Run out of cash? Need a payment plan that doesn’t strangle you?
Installment loans are one of America’s fastest-growing financial products. Nearly 25 million Americans have one already. And there’s a reason why…
Installment loans are different than other ways to borrow money. They offer predictability and flexibility you just can’t get with credit cards or payday loans. But there’s a few things you need to know before you get started.
Let’s dive in.
In This Installment Loan Guide
- What Are Installment Loans Really?
- Major Benefits To Know About
- Key Things To Keep In Mind When Borrowing
What Are Installment Loans Really?
Installment loans are simple.
You take out a lump sum of money. Then you pay it back in fixed installments over a set period, usually a few months to several years.
That’s what makes them different
With credit cards your payment amount varies each month depending on how much you spend. But with installment loans you get a fixed payment schedule. You know exactly how much is due and when you’ll be debt-free.
Personal loans, auto loans, mortgages, student loans. These are all examples of installment loans.
Whenever people need quick financial relief, they turn to same-day approval loans options as it can provide fast access to money with predictable repayment terms. And that installment loan structure with fixed payments makes it easy to budget and plan your finances around the set installments.
Installment loans are rapidly expanding in size and number. The market expanded by 45% in just three years.
Why the growth? Because people are starting to see the benefits of structured repayment over the revolving credit of credit cards and payday loans.
Why Predictable Payments Are A Big Advantage
Do you know what one of the most valuable features is?
Fixed monthly payments.
Most installment loans come with fixed interest rates. The amount you pay each month never changes for the entire loan term, even if market rates fluctuate.
This is HUGE for budgeting. You can set aside exactly what you need each month with no surprises. No variable interest rates. No changing loan balances.
What about credit cards? Credit card payments jump up and down based on your balance and spending. Variable interest rates mean your payment can spike with no warning. With installment loans, you’re locked into that payment from the first day.
Building Credit Score Helps
Did you know…
Installment loans can actually help you build your credit score. When you make on-time payments, you’re building positive payment history, which is 35% of your credit score.
Installment loans also diversify your credit mix. Having a variety of credit accounts makes up another 10% of your credit score. If you’ve only had credit cards, adding an installment loan can help your score.
Of course, the key is making every payment on time.
One missed payment can do serious damage to your credit score. But if you keep making payments, you’re building a foundation for better rates and terms on future loans.
Lower Costs Than Other Options
Alright let’s talk about something important…
The true cost of borrowing.
Installment loans usually come with lower interest rates than other options like credit cards or payday loans. Average credit card APR? Right around 22-24%. Payday loans? Don’t even ask — often over 400-700% APR.
Installment loans typically range from 6% to 36% APR depending on your credit score and lender. That’s a big difference.
Over the course of a loan, those lower rates can save you thousands of dollars in interest. If you borrow $10,000 on a credit card at 24% APR, you could end up paying over $11,000 in interest alone. Compare that to a 5-year installment loan at 15% APR where you’d pay around $4,300 in total interest.
It’s a no-brainer.
Things To Keep In Mind Before Borrowing
Alright, so here’s some things you gotta watch out for…
Qualification
First of all, you have to qualify for the loan.
Lenders typically look for:
- Credit score of the mid-600s or better
- History of stable income
- Debt-to-income ratio under 43%
If your credit score is poor you’re going to either get hit with high interest rates. Or you’re not gonna get approved at all. You may need a co-signer to even get approved for that loan.
The good news is? Even if you have fair credit there are still lenders willing to work with you. You’ve got options.
Fees
Look out for origination fees.
Origination fees are just another way some lenders charge you for taking out the loan. They can be as low as 1% of the loan amount or as high as 10%.
A $10,000 loan with a 5% origination fee gets you $9,500. Not cool. But not every lender charges these fees, so you have to shop around. The lender with the lowest interest rate might not be the best option if they hit you with huge origination fees on top.
Commitment
Here’s something else you need to think about real hard…
You’re locked into fixed payments.
That can be a good thing for budgeting. But unlike a credit card where you can at least pay the minimum if things get tight, you gotta pay the full amount each month on an installment loan.
Miss a payment? You’re looking at late fees. Miss several? You could default on the loan and wreck your credit score for years.
Before you take out an installment loan make 100% sure you can afford the payment, not just now but for the entire loan term.
Borrowing Smarter With Installment Loans
Ok, so if you decide an installment loan is the right path for you here’s some tips…
Shop around with multiple lenders. Don’t take the first offer you see. Rates, fees, terms all differ between lenders. Shopping around can save you hundreds or even thousands.
Pay attention to the loan term. Shorter terms mean higher monthly payments but less total interest. Longer terms lower your payments but cost you more in the long run.
Only borrow what you need. You may qualify for a $20,000 loan but that doesn’t mean you should take it all. Borrow the smallest amount that will cover your needs. Smaller debt means less stress and quicker payoff.
The Bottom Line On Installment Loans
Installment loans can be a great financial tool if you use them right.
They provide predictable payments, may have lower rates than credit cards, and let you finance big expenses over time. If you’re a borrower that needs structure and a clear path to being debt-free, they’re often the best choice.
But, they’re not risk-free. You need to qualify, be aware of the fees, and be willing to make every payment on time.
In the end, it comes down to your personal situation. If you have a specific need you can cover, a steady income, and the discipline to stick to a payment schedule, an installment loan can help you reach your financial goals.
Just make sure you do your research and:
- Shop around for the best rates
- Know all fees and terms
- Borrow only what you really need
- Have a plan to make every payment
Don’t sign on the dotted line without doing your homework. The right installment loan can help you move forward financially. The wrong one can push you backward.
Frequently Asked Questions
What’s the difference between installment loans and revolving credit?
Installment loans give you a set amount of money upfront and a fixed repayment schedule. Revolving credit like credit cards lets you borrow and repay up to a certain limit with variable payments.
Can I pay off an installment loan early?
Most lenders let you pay off early but some charge prepayment penalties. Check your loan agreement before signing to make sure early repayment fees aren’t applied.
What happens if I miss a payment?
Missing a payment will hit you with late fees and ding your credit score. Multiple missed payments can lead to default and long-term credit damage.