What are Installment Loans?Published on March 5, 2021 by Daniel Azzoli
As nice as it would be to have a trove of cash sitting in a bank account to help with everything from buying a house to dealing with a minor emergency expense, the truth is, most people can’t count themselves so lucky. When you’re living on a tight budget, deviating from your normal budget by even a small amount can throw your finances out of whack, and you can be left struggling to handle your regular expenses.
If you find yourself in need of some extra cash for one reason or another, installment loans may be able to help. Because there are all sorts of different types of installment loans out there, they might be able to help you in a whole host of different situations.
But before you even consider applying for one, it’s important you take the time to understand the important details that make them what they are. Today, we’re going to give you a simple installment loan definition, take a look at some common examples of installment loans, and go over some of their potential benefits. Let’s get started!
Installment Loan Definition
In the simplest of terms, an installment loan is a lump sum of money that you borrow from a financial institution that you’ll need to pay back (along with interest and/or fees) in a series of scheduled payments that can span anywhere from a few months to several years. Some of the important details of your loan, like the amount you’re approved for and the term of your loan, may change depending on all sorts of factors, like:
- the type of installment loan
- the financial institution you’re working with
- your income
- your credit history
Your term can even be affected by how frequently you get paid by your employer. Regardless of the specifics of any of these details, one you’ve paid off your loan, the account is generally considered to be closed. This means that you’ll need to apply for a new loan if you need funds again.
Another important point to note is that installment loans can either be classified as secured or unsecured. In the case of secured loans, you’ll need to pledge some form of collateral in order to be qualified. If you default on your loan, the financial institution may seize that asset. With unsecured installment loans, you won’t need any collateral, but you’ll generally see higher interest rates than you would with a secured loan.
3 Common Examples of Installment Loans
Like we mentioned, an installment loan is really a broad category with all sorts of different types of loans within. They can be further classified as business loans or personal loans, and although there can definitely be some overlap in regard to their general structure, today we’re exclusively talking about personal installment loans.
The loans on the list below are fairly common examples of installment loans; you may even have one yourself! Let’s take a closer look at the details surrounding these loans.
1. Short-Term Personal Installment Loans
Like we said, all the types of loans on this list are considered personal loans, but this particular category is a bit broader than the others. While these loans can technically be used for anything, they’re often intended to be used to help you handle an emergency expense when you don’t have an emergency savings fund at the ready.
Generally speaking, and unlike the other entries on this list, these loans will often be unsecured. So while you won’t need to offer up any collateral, they may come with higher interest rates than certain other types of installment loans. Because these loans can be used for a number of different purposes, your repayment period could span a couple months or even a few years.
If you’re a homeowner, then there’s a good chance you either have a mortgage right now, or you’ve had one in the past. This is a type of installment loan that is specifically designed to help facilitate the purchase of a home.
The way this typically works is that you’ll put down a down payment (a portion of the total value of the home) towards the home you’re buying, and the mortgage will fill in the remaining gap between your down payment and the total amount you’re buying the home for. You’ll then pay off the mortgage over the course of several years. These payments will generally be made up of a portion of the principal balance of the loan plus interest, insurance, and taxes.
Because the size of the loan is so big, the payments are usually spread out over the course of many years. While the length can vary, it’s common to pay back your mortgage over a 15- or 30-year term. These loans are considered secure, where the collateral you’re pledging is the equity you have in your home.
3. Auto Loans
Like mortgages, auto loans are intended for a specific purpose. In this case, they’re used to help you buy a vehicle. And like mortgages, they’re also usually secured. The collateral being offered in this case is the car you’re purchasing.
The term of an auto loan can vary, but they generally range between 36 and 72 months. Like most installment loans, the longer the term, the lower your monthly payments will generally be. Having said that, a longer term may come with a higher interest rate, meaning you’ll actually be paying more over the course of the loan than you would be with a shorter term.
3 Potential Benefits of Online Installment Loans
Another distinction to make between different types of installments loans is whether they’re online or in person. While you might be more comfortable going through the borrowing process in person, there are definitely some potential benefits of installment loans online that you may not experience by doing things at a brick-and-mortar location. Let’s take a look at some of the biggest ones.
1. Simple and Accessible Application Process
When you’re dealing with installment loans online, getting the ball rolling is usually a fairly quick and easy process. You should always start by researching different types of loans and comparing different offers from different financial institutions, but once you’ve landed on a loan you want to apply for, getting started is easy. While there can be some variance between different institutions, many online loan applications generally only take a few minutes to fill out, and you can usually start your application 24/7. You won’t need to find the time in your busy schedule to make an appointment, and you won’t need to work around their hours.
2. Options for Different Credit Scores
You might have this idea in your head that if you don’t have a great credit history, there’s no way you’ll ever be approved for a loan. But that’s just not true. With online installment loans, it’s easier to do your research to get access to information on more lenders and find options for people at both ends of the credit spectrum. So, if you’re in need of some financial help, you may be able to find installment loans for bad credit online.
While financial institutions that offer these types of installment loans may look at your credit history, they may weigh certain other factors more heavily when deciding whether to approve your loan request or not. They’ll likely look at things like your income, employment history, and certain banking information.
So just remember, if you’ve run into some money problems in the past that have dealt a big hit to your credit score, this doesn’t necessarily mean that you’re completely cut out from the world of online borrowing.
3. Convenient Process
Like we’ve said, the application process for installment loans online is often fairly quick. This is just one piece of the puzzle that makes the entire online borrowing process fast.
When you apply for a loan online, it can often go like this: You start your application whenever is most convenient for you. This application only takes a few minutes to fill out. Your application will then be reviewed (the amount of time this will take can vary between financial institutions), and if approved, you can even have the funds in your bank account as soon as the same business day in some cases. How fast your loan is funded will depend on the financial institution you’re working with as well as your bank.
With an in-person loan, you’ll often need to work around their business hours just to start the application. If you live far from the storefront or you’re just generally busy, you may have to wait until you have the spare time to go to the lender. There are all sorts of other variables that can drag the in-person process out, and when you need funds fast, you may not have time to spare. With online installment loans, all you need to apply is an internet connection and a few minutes of your time.
Research Your Options Before Applying for Installment Loans
There are all sorts of reasons you might need an injection of cash to help you out. Maybe you’re looking to make a big purchase like buying a house or car. Or maybe your back is against the wall and you need some fast help to deal with an emergency expense. Whatever the case may be, there might be an installment loan out there to suit your needs.
Just remember that whenever you’re making a big financial decision like applying for a loan, it’s important to do your research and be wary of scams. You may see advertisements for things like guaranteed installment loans for bad credit, but the truth is, there are no guarantees. So, if you’re ever offered a loan like this, stay away.
Want to learn more about what to look out for when you’re looking for a loan online? Take a look at these 7 warning signs of online loan scams.