Installment Loan Basics
Installment loans are basically loans that are repaid with a given number of scheduled deposits over time. The loan is repaid with at least two payments in an agreed period of time. The loan’s term may take from as little as two months to even years. A good example of an installment loan is a mortgage. An auto loan can also be classified as an installment loan but a credit card which requires monthly payments is not.
This type of consumer loans is locally originated and serviced. The periodic payments you make as a borrower include the loan’s principal and interest. Installment loans are generally considered as a safer and more affordable form of borrowing compared to other locally available options such as payday loans, title loans, and credit card borrowing.
Common characteristics of installment loans
The amount provided in an installment loan ranges from around $150 to thousands of dollars. The loan’s principal, interest, and other charges such as the processing fees and credit insurance premiums are usually repaid in fixed monthly installments spread over several months to a couple of years.
The annual percentage rate of most installment loans ranges from 25 percent to close to 100 percent. The APR in this type of loans is sometimes higher than the APR stated in the loan contract mainly because you have to buy one form or another of credit insurance when you get the loan. This happens because the lender, according to the federal Truth in Lending Act, is not legally obligated to include credit insurance purchase charges in the APR calculation.
As a borrower, you have the option to renew the loan every few months but with new fees, new interest, and credit insurance costs. The renewal is often provided with a small payout of the principal paid off in previous installments. Typically, the loan is reset to the original amount you had previously borrowed, with a significant increase.
Installment loans are usually secured by any type of personal property except real estate. You can provide your car, electronic items, tools and equipment, jewelry, and even firearms as collateral. Wedding rings are not accepted in most cases.
Benefits of installment loans
Besides the fact that installment loans provide a fast and easy way of accessing funds in times of need, they also have a few other benefits. For instance, people with bad or poor credit can use these loans to build credit. The loans require multiple payments over time and can, therefore, be used to build a history of repayment. Many lenders usually report your credit repayment history to relevant credit reporting agencies, which helps to improve your credit score especially if you have been making timely payments.
Installment loans often come with high interest mainly because consumers of such loans are low-income individuals, probably with bad or poor credit too. These are subprime borrowers who cannot access cheaper loan options from banks or credit unions. The loans are, however, quite useful in handling urgent personal or business financial needs. They can also be used to build your credit score.