The Pros and Cons of Installment Loans

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Installment loans are loans that are paid off over a given period of time. You make payments in installments until the debt is paid off. This may be four weeks or four months, but they’re rarely stretched out longer than that. Car loans and student loans would be the exception here. Let’s look at both the advantages and disadvantages of installment loans. We’ll also share a few observations about installment loans that are not clear points for or against them. 

The Advantages of Installment Loans 

You can shop around for installment loans. For example, you could get personal installment loans with Personal Money Network. You can compare interest rates, loan terms, and lender ratings. You can find a lender with the lowest interest rate or who lets you extend the payments over the longest period of time.

Installment loans are generally independent of your credit. This makes them an option even if you have bad credit. In fact, if you’ve come out of bankruptcy, they’re one of the few borrowing options available to you. Installment loans secured by an asset like your car will have a lower interest rate, though you risk losing the asset if you miss a payment or two. 

Unlike credit card debt, installment loans are structured so that you pay off the debt with the last installment. Make every payment, and you’ll be done. This is very different from credit card debt, where making a monthly minimum payment allows the balance to grow. You could end up making payments on your credit card for years, even if you stop charging things to the card.

Your income is what secures the installment loan. If your income is high enough and you don’t have one of the few strikes against you that could disqualify you, you’re eligible for the loan. If you have a modest income, you may still qualify for a loan for several hundred dollars. 

Installment loans are among the most flexible loans available. You can choose the lender, the loan amount up to their upper limit, the day you receive the money and the number installment payments you’ll need to make. Good luck getting a business loan on a Saturday night to fix your delivery truck. The lender doesn’t care what you do for a living or how you’ll pay back the money.

Installment loans are generally approved in a matter of hours. The money could be in your bank account tonight or tomorrow morning. A mortgage home equity line of credit or business loan may take days to be approved and require you to wait a week or more to gain access to the money. If you apply for a credit card online, you may not be able to do anything with it until it arrives in the mail. That can take days. 

The payments on an installment loan are predictable. You know how much you have to pay and when. This is in contrast to credit card debt that may spiral upward because they jacked up your interest rate and payday lenders who may tack on surprise fees. 

The Disadvantages of Installment Loans 

Installment loans like many other unsecured loans have a relatively high interest rate. You’ll pay rates that rival that of credit cards, though they’re generally not as high as payday loans. 

While a lender offering installment loans won’t check your credit, they will report missed or late payments to the credit bureaus. That will affect your credit score

Installment loans are generally based on your stated income. If you don’t get several full work shifts or overtime as expected, you could end up in a cash crunch. If you have to restructure the loan such as asking the lender to reduce the payments and stretch them out over time, you will end up paying much more than originally planned. 

Many websites pose as installment lenders when they’re really phishing for your financial information. No legitimate lender will ask for your bank login information, though they may ask for the bank account number so they can deposit the money in the account. They’ll ask for identification. They will not demand upfront payment before you can receive money. Never submit your personal information to a “lender” who doesn’t have a valid address, phone number and other basic business contact information. If you aren’t sure, don’t do business with them. Don’t do business with a lender who says they want you to pay them back via money order or wire transfer. 

Observations About Installment Loans 

You may need to do some research to make sure you’re eligible for a given lender, since they may not be allowed to loan money to someone in another state. Different states have different criteria, too. For example, lenders in one state may not be allowed to loan money to someone under 21, while lenders in another state may not be allowed to loan more than one thousand dollars in a single transaction. The lender should list the disqualifiers on their home page, and their website should warn you if you’re not qualified the moment you submit the application. 

Installment lenders don’t ask you what the money is for. You could borrow the money to pay your rent, repair your car or spend frivolously. This is in contrast to business loans where lenders want a business plan showing how you’ll pay them back before they seriously consider the request.

Installment loans may have prepayment penalties. This is a penalty you’ll owe if you pay off the loan early. Research the loan’s terms and conditions because you can choose loans that don’t have this precondition.

An installment loan with a formal lender will give you the money you need without forcing you to ask friends and family to give you money. Most installment loans will not even allow for a co-signer, though car and student loans are another exception to this rule.

Installment loans are difficult to restructure, and lenders will charge you a penalty if you defer or delay a payment. If you can’t afford the payments, start selling items and working overtime to pay the bills.

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