An installment loan is a loan meant to be repaid in scheduled installments over a certain period of time. These loans can be commercial or personal and secured or unsecured. Here are four interesting facts about installment loans.
1. Common Uses
Installment loans used for commercial purposes typically involve furthering your career, such as paying for coding classes, or funding something for your small business, such as new equipment or facilities. There is a bit more variety when it comes to personal installment loans. Mortgages and auto loans fall into this category, as do payday loans and student loans. You can also apply for personal loans for other reasons, such as paying for medical bills or a large event. Installment loans may be secured, which means the lender requires collateral, or unsecured, which means the lender forgoes collateral and uses your credit history to determine your level of risk before deciding whether to approve your application.
2. How To Apply
To apply for an installment loan, you need to fill out an application as you would for any loan. You can do so with any number of lenders. The lender you choose may depend on what you’re planning to use your installment loan for and how quickly you’re hoping to be approved. For example, a bank such as Wells Fargo may take more time to approve your application but is more reliable for student and car loans, while an online lender such as MaxLend is ideal for quick funding needs such as medical bills.
3. Advantages And Disadvantages
There are several advantages and disadvantages associated with installment loans. These loans tend to be predictable because payments are scheduled to occur monthly, so they’re easy to plan around. They also tend to have fixed rates and relatively high credit limits. However, they can have higher interest rates than other types of loans and tend to lack flexibility in terms of payments, making it difficult to recover from a missed or late payment.
4. Effects on Credit Scores
An installment loan can positively or negatively affect your credit score in three ways: credit utilization, credit mix and payment history. Credit utilization is a ratio determining how much of the money in a loan you use at once. If you use too much, you can be considered a risky borrower because lenders will consider you to have too much debt. Your credit mix refers to what kinds of credit and loans you have in your credit history. If you have none, then lenders won’t know what kind of borrower you are. If you have too many, then lenders may see you as too much of a risk. Payment history tends to be the most important factor in determining someone’s credit score. Making appropriately sized payments on time each month improves your score because you’re seen as a responsible and low-risk borrower.
Installment loans can be used for a number of reasons. You should consider why you want to apply for a loan and research whether an installment loan is the right type of loan for your needs before you make any decisions or submit any applications.