What is an installment loan? An installment loan is a loan that is repaid over time with a set number of payments. The principle and interest are paid back in equal installments and can be secured by the product or personal property of the borrower. These loans are used on major purchases that take longer to pay off. It may take a few months up to many years to pay off. This is a great way to pay for a car, home, or even college.
Installment loans are different than payday loans. According to Avant.org, “In general, payday loans are for a shorter duration, have a higher interest rate, and are often paid back in a single lump sum payment on the borrower’s next payday. In contrast, an installment loan can last for many months and payments are evenly spread out over the term of the loan.”
Installment loans can help those with bad credit or no credit history. How is this possible? These installment loans require multiple payments over a period of time, so it builds a repayment history. This history can be reported to credit agencies and help increase scores if the payments are done on time.
Installment loans are easy to understand because of the few changes there are after the set up. This loan allows you to understand how much to put aside each month so you can pay it back. Making larger payments or extra payments can lower future monthly payments and interest, but it would require a recast (mostly done in mortgages), which is a recalculation of the monthly payments. In most cases, you will have to request this from the lender.
Just remember, do not get a loan you cannot afford. This type of loan requires the responsibility of budgeting and monthly repayments. Only get it if it’s right for you.