Sometimes, you need additional cash through a loan to fulfill an urgent need. However, you might find it so stressful to repay your debt because of the loan’s size and the short window of time allotted for repayment. Avoiding such stress is only one of the many advantages of obtaining the funds you need through installment loans.
Read on below to learn more about installment loans and the benefits of taking out one for important urgent expenses.
Installment Loan: How Does It Work?
An installment loan is a kind of contract or agreement between a bank or a lending company, which offers a loan, and a borrower, generally for a specific amount of time. Some set number of scheduled installments, usually two to three payments, are made toward the loan. The term of the loan can be as short as only a few days and can be as long as 30 years. These quick installment loans are often used to pay off the principal of other loans, such as credit cards or mortgages, and are designed to provide the borrower with the cash to pay off the current debt that they’re in.
There are two kinds of installment loans: secured and unsecured. Here’s a closer look at them:
- Secured Installment Loan – Here, the borrower has collateral in the form of a home, car, land, or any other type of property that can be used as collateral against the payment of the loan. This loan can only be used for a specific purpose. Most banks or lending institutions will require the borrower to demonstrate a monthly income to be approved.
- Unsecured Installment Loan – An unsecured installment loan is used when the borrower is trying to consolidate their existing debts, such as credit card bills, medical bills, or personal loans. This type of loan is available to both people who are employed and aren’t currently employed. An unsecured installment loan has no collateral required by the lender, so it’s considered a more flexible option.
Different Types Of Installment Loans
Here are the different types of installment loans available for borrowers:
1. Auto Loan
An auto loan is usually an installment loan taken out to purchase an automobile. Auto loans are generally structured as short-term installment loans, and are normally secured by the full amount of the car being bought. Auto loans can be secured or unsecured loans, depending on the terms and conditions stipulated in the agreement of the loan agreement between the borrower and lender. Some types of auto loans are considered unsecured auto loans, which carry higher rates of interest as compared to secured auto loans because of the increased risk attached to them. The terms and conditions of the secured auto loans differ from lender to lender.
2. Mortgage
In most cases, a mortgage will be used by a person in order to purchase a house. A home is considered to be owned by a person if they can make payments on it every month. The terms are used in order to describe a contract between an individual and a bank or lender.
There are two kinds of mortgage: the fixed-interest mortgage and the adjustable-rate mortgage.
- Fixed-Interest Mortgage – With a fixed-interest mortgage, the mortgage holder will pay the exact same interest rate on the property for the entire life of the mortgage. The initial monthly payment and principal amounts don’t change from the beginning mortgage payment to the end. That means when real estate market rates drop, then, the lender’s payment doesn’t drop. It’s also true when real estate market rates are relatively high. The mortgage holder doesn’t have to worry about fluctuating rates or the current market rates since the mortgage rate is the same at all times.
- Adjustable-Rate Mortgage – There’s also an adjustable-rate mortgage. This type of mortgage allows a person to change the interest rate. This is done by adjusting the monthly mortgage payments. With an adjustable-rate mortgage, it’s important to understand that the interest rate changes based upon the average of the federal funds rate plus a certain amount. Therefore, it’s very important for a person to understand the difference between a fixed interest and an adjustable rate. Adjustable rate mortgage has more risk, since it depends upon how the money is going to be borrowed. It may result in a higher monthly payment, but the interest rate may decrease over time and result in a lower monthly payment.
3. Personal Loan
A personal loan is typically a loan that’s repaid over a certain period of time by the borrower with a predetermined amount of scheduled monthly payments. It may be an unsecured loan or a secured loan (usually a car loan, home mortgage, or student loan). The reason you’d need this type of loan is that it allows you to buy something that you may not be able to afford if you didn’t have the money. If you have a job and good credit, you might qualify for a low interest rate on the loan. You could also qualify for a higher interest rate if you’re considered a high-risk borrower.
If you don’t have good credit and a high credit score, your interest rate will be very high and you’ll end up paying a higher monthly payment. Because of this, it’s very important to find a personal loan that fits your current financial situation. It would be very easy to get caught up in a cycle of debt and just end up in worse financial straits than when you started. Make sure to take the time to research all the different lenders in your area to find one with the lowest interest rate possible.
In order to apply for a personal loan, you’ll need to make sure that you meet the basic requirements that lenders ask for in order to be approved for a personal loan. Your credit score, employment history, income level, assets, and all other information that the lender requires must be current and up-to-date. Once the lender has approved your application, they’ll send you a personalized check. You, then, need to mail it to the lender within 30 days in order to pay off your loan.
Benefits Of Getting An Installment Loan
Ever wondered what the benefits of taking out an installment loan are? These are the following:
1. Fast Processing
With a fast turnaround time, it’s no wonder why so many people are turning to online loans. One of the greatest benefits is the fact that you’ll be able to obtain your loan in just a few days. If you don’t have the time to wait weeks or months to obtain your loan, this option is right for you.
2. Flexible Terms
Installment loans offer flexible terms, and it’s one of the most important things to see about an installment loan. Many times, you’ll be able to pay off your debt in a very short period of time with this type of loan. This is great for times when you simply need some quick money to cover emergencies.
3. Competitive Interest Rates
There are many different interest rates that are available to those who are looking to take out an installment loan. You can often find that these interest rates are quite competitive. This means that you’ll be able to get a good rate and won’t have to worry about getting behind in payments. This is a great benefit for those who are looking to make their monthly payments on time.
4. High Borrowing Limit
Installment loans typically come with a high borrowing limit. This borrowing limit is determined by the current market conditions. The borrowing limit depends on the current interest rate and creditworthiness of the borrower.
In comparison, other types of loans that provide low rates and flexible terms don’t come with a similar borrowing limit. Because of this, unsecured loans are typically the first choice of most borrowers when it comes to getting quick cash for fulfilling urgent needs. The ability to easily pay off debts by making just one monthly payment makes these loans one of the most effective ways to save money on a monthly basis.
Furthermore, because these loans come with high borrowing limits, they allow borrowers to make more monthly payments on a lower amount of debt. In turn, it will save money on interest over the long run. In many cases, it can mean a significant reduction in monthly payments that can be used for other types of expenses, such as higher education or home improvements.
5. Helps Build Credit Score
Another benefit of getting an installment loan is that they can help you rebuild your credit score. Most people don’t think about this, but getting approved for this type of loan can actually improve their credit scores. A lot of people who are not interested in paying off their loans in full are opting for installment loans because they think they can pay off the balance in a few months. The loan could save you from falling into a debt trap. When you have a good payment history on an installment loan, it becomes easier for you to qualify for other loans.
Final Thoughts
Make sure that you fully understand the repayment terms before signing up for an installment loan. It’s also important that you know you can really meet the repayment schedule. During times when you need cash quickly, an installment loan can be a great option when managed well. The benefits of taking out installment loans discussed above say it all.
