Consumers interested in borrowing money to meet their financial needs may want to consider an installment loan. This type of loan requires a fixed monthly payment throughout the term, which could make it easy to calculate into a budget.
But before taking out an installment loan, youâ€™ll need to know the basics, from the pros and cons of taking one out to how to qualify.
An installment loan is a loan that combines the principal loan amount with an interest rate. That total is then scheduled to be paid back in equal amounts over a set time frame. Typically, these loans are repaid monthly and may require some form of collateral.
Several variables determine an installment loanâ€™s monthly payment. Notably, your credit score affects the interest rate you receive. The better your score, the better your rate may be. The amount you borrow and the loan term are also factors that affect repayment.
The four most common types of installment loans are:
Although there are many types of consumer and business installment loans, we will focus on personal loans.
Payday or vehicle title loans may be considered installment loans. But payday and vehicle title loans tend to have short repayment terms, typically 30 days or less. Traditional installment loans, such as personal loans, generally have longer repayment terms. Our personal loan marketplace shows lenders offering terms from 12 to 84 months.
But payday loans and auto title loans are considered risky when compared to other types of loan products. The Consumer Financial Protection Bureau reports that default rates on vehicle title and payday installment loans are high, with online payday installment loans listed as the highest. The bureau also points out that borrowers with a greater payment-to-income ratio were more likely to default on their loan.
One of the biggest disadvantages of payday loans, besides their high interest rates, is the number of scam lending companies. Consumers must do their due diligence and look for red flags before doing business with a payday loan lender. A few common red flags include:
Reliable companies that offer the best personal loans will have a positive Better Business Bureau rating, so you can start there when looking for a legitimate installment loan lender. Afterward, check to see if the company is registered with your stateâ€™s Attorney Generalâ€™s office or your stateâ€™s banking department, as this is a rule for all lenders and loan brokers.
Before deciding on whether an installment loan is right for you, itâ€™s helpful to review the pros and cons.
Once youâ€™ve identified a few legitimate lenders, youâ€™ll want to make sure you qualify for an installment loan. Consider the following general requirements before you fill out the loan application:
After youâ€™ve determined that you qualify for a personal loan, you can begin comparing offers to find the best deal. There are several reputable lenders to consider.
Banks such as Wells Fargo, PNC Bank, Citizens Bank and TD Bank offer installment loans. Besides finding the lowest APR, youâ€™ll want to check for fees.
Keep in mind that each bank application may result in a hard pull on your credit, which can negatively affect your credit. Before shopping for rates, you may want to use our personal loan calculator to get an idea of what kinds of rates you can afford.
Another credible option is to apply for an installment loan from an established credit union, such as Alliant, PenFed and Navy Federal. Credit unions have some of the lowest APRs, which works in your favor by giving you a smaller monthly payment.
For example, Alliant Credit Union has a 12-month personal loan with a 6.24% APR, while Wells Fargo Bank starts its 12-month personal loans at 7.24% as of Oct. 5, 2018.
But with this type of lender, you may have to become a member before you can qualify for loans. Call the company to learn about its eligibility requirements. Navy Federal Credit Union, for example, accepts service members and their family, as well as Department of Defense civilians. PenFed welcomes volunteers, association members, those with a military affiliation and certain employees whose employers partner with the company.
Online lenders, such as Earnest, SoFi and Upstart, may be convenient options. Their applications can be completed online and in little time. Most of these companies also allow you to submit to a soft credit check to review rates. A soft credit check wonâ€™t affect your credit score.
Another perk in shopping for online lenders for an installment loan is how quickly youâ€™ll receive your funds once approved. SoFi releases funds a few days after address verification. Upstart awards funds the next business day after acceptance.
If you do your homework and find a legitimate lender with favorable terms, an installment loan can be a great financial tool to meet your personal needs. Youâ€™ll easily be able to add the monthly payment amount to your budget and have a clear time frame of when the loan will be completely paid off.
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