What Is an Installment Loan?

More and more people than ever before are turning to personal loans for major purchases. Understand what is an installment loan and if it's the right option.

Americans are taking on more debt than at any point since the 2008 financial crisis. Consumer debt is now at $14 trillion dollars.

A lot of different types of debt make up that number from mortgages to credit cards. People are also turning to installment loans for a variety of reasons. They may want to make ends meet.

Have you never heard of installment loans? They’re among the most common type of debt. Keep reading to learn what is an installment loan and how you can use them.

What Is an Installment Loan?

Are you curious as to what an installment loan is? You’re probably more familiar with an installment loan by the purpose of the loan.

You’re familiar with auto loans, mortgages, personal loans, and student loans. These are all installment loans. Even Boat loans are mostly famous among people who look to own their personal boat.

Installment loans are loans that allow you to borrow a fixed amount of money (principal) at a certain interest rate. The principal and interest are calculated. That amount is then divided by the terms of the loan, which is how long you have to pay the loan back and how often you make payments.

That will give you a fixed amount to pay back, usually in monthly payments. These monthly payments are called installments.

Installment Loans vs. Other Types of Credit

How do installment loans differ from revolving lines of credit and credit cards? With revolving lines of credit and credit cards, you have credit available as you need it.

For example, you have a $10,000 revolving line of credit at a set interest rate. You could have a credit card with a $5,000 limit.

When you use these revolving lines of credit, you want to pay them off as quickly as possible because you’ll pay more in interest over the long term.

Installment loans are usually paid back in fixed amounts spread out over the life of the loan. This makes budgeting and managing your debt a lot easier.

Installment loans are typically available at lower interest rates. That would ultimately depend on your credit score. On average, credit cards have a 17% interest rate. A mortgage rate is just under 4% at this time.

How to Get an Installment Loan

There are many reasons to get an installment loan. You can finance your education, home or auto purchase. You can use a personal loan for any reason.

Many people use personal loans to consolidate credit card debt. That allows them to take care of their debt at a much lower interest rate. Others use them to start a new business or to pay for a home upgrade.

The great thing about installment loans is that they give you financial leverage. You can do what you want but you have to be wise about using credit. Otherwise, you’re just digging yourself deeper in debt.

The Purpose of the Loan

When you realize that installment loans are great to use, you may want to rush out and get one right away. It’s best to take a measured approach before you borrow money.

Sit down and think about what you’d use the funds for. You want to make sure that it’s worth taking on more debt and a monthly payment.

How Much Can You Afford?

You also want to make sure that you don’t overdo it on the loan. The last thing you want is to be in a situation where you have to take out another loan to pay off this loan.

You also want to be sure that you can afford the monthly payments each month. There are some guidelines that you can follow depending on the purpose of the loan.

A mortgage payment guideline is that the monthly payment shouldn’t be more than 28% of your income. For a car loan, that should be between 15% and 20% of your income.

You want to have a set number in mind that you know that you can pay off each month.

Your Credit Score

Do you know what your credit score is? That will play a huge role in your ability to get a loan and the interest rate of the loan.

The higher your credit score, the more likely you are to get approved for a loan. You’re also an excellent candidate for a lower interest rate.

For larger loans, you’ll want to take steps to clean up your credit before you apply for a loan. You’ll be able to save a lot of money on interest rates in the long run.

Preparing for the Loan

Banks will hold you to very high standards for loans with a high dollar amount, such as a mortgage. They want to see pay stubs, bank accounts over two years, a high credit score, two years of employment at the same job, and tax returns.

If you’re taking out a personal loan, lenders won’t hold you to a very high standard. They’ll want to know your income and credit score. In some cases, you can even get a loan without a credit check or with bad credit.

Before you apply, you’ll want to get the proper documentation together for the lender.

Shopping for Installment Loans

The best place to shop for an installment loan will largely depend on the purpose of the loan. Credit unions and community banks often offer the best rates for mortgages and auto loans.

With personal loans, you have a much broader range of options. You can get online installment loans that offer good rates and fast access to cash.

You want to make sure that you look at all of your options and compare interest rates, monthly payments, and the length of the loan before you make a commitment.

Installment Loans for Any Purpose

What is an installment loan? It’s really a financial tool that you can use to improve your life. When used responsibly, you can clean up your credit or upgrade your kitchen.

The best way to get an installment loan is to know the purpose of the loan and to shop around. That will keep you from taking out a loan that you can’t afford.
Do you want more inspiration to live a better life? Head over to the Inspiration section of the blog for more great tips.
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