Installment Loan: Definition, Examples, and Alternatives

What Is an Installment Loan & What Is The Application Process

Borrowers who obtain these loans repay them in recurring installments. They usually obtain installment loans from banks, online lenders, or credit unions. Some people refer to them as revolving loans. Borrowers with bad credit turn to installment loans when they fail to qualify for traditional loans. It makes them the preferred choice for most borrowers. Borrowers have the freedom to choose a repayment period that best suits them. Installment loans are secured. It means that borrowers do not need collateral to borrow. As a result, lenders consider them risky and charge higher interest rates than the secured loans. Installment loans include student, personal, and loans. 

Borrowers looking for payday alternative loan have a few options. The first option is to obtain a payday loan. Payday loans are short-term loans that borrowers need to repay on their next payday. The loan term is typically between two and four weeks. Payday loans are associated with high-interest rates compared to other loan types. The next alternative to an installment loan is borrowing money from friends or relatives. It is an informal loan, and borrowers do not need to worry about paying interest rates. Another alternative to consider is a credit card loan. It permits borrowers to obtain money against their future earnings. Borrowers use these loans for significant purchases such as electronics, furniture, and cars. Credit cards are another loan option with expensive rates. Auto title loans are another option to consider. Borrowers use these loans to obtain cash against their vehicle’s value. They are a popular choice for borrowers with bad credit. 

What is an Installment Loan?

An installment loan is designed to enable people to obtain a predetermined amount. People pay back these loans plus their interest over extended periods. These could be months or years. Borrowers obtain them for a specific or general purpose. Many borrowers prefer obtaining installment loans over other loan types. It allows them to pay it with fixed monthly interest rates. With such a plan, it becomes easier for borrowers to follow a budget. These loans allow borrowers to obtain significant amounts that they would from a payday loan. 

How does an Installment Loan works?

Installment loans facilitate people to acquire significant credit with longer and more flexible repayment terms. Installment loans are acquired from credit unions, online lenders, and banks. To get an installment loan, borrowers must apply from the lender by providing the required details. The lender checks the details to verify the validity and either approves or denies the loan application. Once approved, the lender disburses the loan. Customers get the money in their bank accounts within 24 hours after approval. Borrowers then start to make the repayments until the full loan is repaid. They are a popular way to finance significant purchases or consolidate debt. 

What are the Installment Loan examples? 

The following are installment loan examples:

Auto loans

Auto loans help people to fund the possess of buying a car. Vehicle loans are secured by the car itself. Lenders have the right to repossess the automobile if the borrower defaults on the loan. Borrowers typically repay the loan monthly over several years. The auto loan industry is a vital part of the economy. It helps to fund the acquisition of vehicles, a necessity for many people. 

The industry works by lending money to consumers so that they can purchase a vehicle. The loan is typically paid back in monthly installments. It helps to keep the industry afloat. A typical example of an auto loan is a car loan. Borrowers must consider the interest rates before obtaining an auto loan. The interest rate is the cost of the loan. Borrowers repay the full loan amount plus the interest rate. Interest rates vary depending on many factors. These include the lender, vehicle type, and credit score. To obtain the best deal, borrowers must shop around to find lenders willing to work with them.

Mortgage loans

Borrowers looking to finance the acquisition of

Mortgage loans are a type of credit used to finance property acquisition. In most cases, people use it to buy a home. The home secures the loan. Therefore, if the borrower defaults on the loan, the lender forecloses on the property. Lenders sometimes sell it to recoup the loan amount. 

Mortgage loans are important for homebuyers. They allow them to obtain property without paying the full price upfront. They make buying a home more affordable to many home buyers. Mortgage loans are important for creditors because they allow them to earn interest on their money. Mortgage loans are typically repaid over 15 or 30 years, making them a long-term commitment. The monthly payments on a mortgage loan are typically higher than on car loans. The loan amount is usually much larger. Compared to other loan types, mortgages come with fair interest rates. Most borrowers find it a more affordable option.

Personal loans

These loans are typically not secured by collateral. Borrowers use these loans for personal expenses. Fixed interest rates and fixed terms are the common features of personal loans. It means a borrower makes a monthly payment until the loan is paid. These loans are associated with high-interest rates compared to secured loans. An example of a personal loan is a bank loan. Personal loans are important because borrowers can use them for many things. They use them to pay for unexpected expenses, finance vacations, make home improvements, and consolidate their debts. Borrowers must understand the personal loan’s terms and conditions before applying.

Student loans

A student loan is a loan that helps students pay for their education. Student loans typically cover the cost of books, tuition, and other education expenses. Student loans are repaid over an extended time. Student loans ate divided into federal and private loans. Financial institutions like banks provide private student loans. They come with variable interest rates. The government offers federal student loans, and they come with fixed interest rates. To obtain student loans, borrowers fill out a Free Application for Federal Student Aid (FAFSA) form.

What are the advantages of installment loans?

  • They are easy to repay: They are easy to repay because they are structured as small, manageable payments over time. It is a good option for people with poor credit. Those who need cash quickly and cannot qualify for a traditional bank loan opt for installment loans.
  • Repayment flexibility: Flexible repayments make it easy to afford installment loans over other loan types. Whether traditional or tribal installment loans, borrowers have the freedom to repay the loan with monthly, semi-monthly, and bi-weekly payments. 
  • Bad credit allowed: Borrowers with bad credit find installment loans the best option. Most installment loan lenders do not check a borrower’s credit score. They approve the loan based on the borrower’s ability to repay it. Borrowers with a stable income source have the highest chances of obtaining an installment loan with bad credit. 
  • Easy Application Process – Getting an installment loan approval takes only minutes. All borrowers need to do is fill out an application form. They need to submit documents proving their identity and employment status. The information helps the lender verify the applicant’s eligibility for the loan. Once verified, the borrower gets the loan within 24 hours.

What are the disadvantages of installment loans?

  • High-Interest Rates: Many lenders charge high-interest rates on installment loans. Some lenders charge more than 30% APR. It means that borrowers must make large monthly payments to cover the cost of the loan. A borrower is likely to default on the loan if they do not have enough income to cover the payments.
  • Additional fees: Borrowers who miss repayments risk additional fees from the lender. 

How to get an installment loan?

The process of obtaining an installment loan is relatively simple. The first step is to fill out an application with the required information. The information includes personal details such as name, address, contact information, and financial information. In the second step, the lender reviews the information and decides whether or not to approve the loan. The third step involves the lender giving the borrower a loan agreement. The agreement outlines the loan terms, including the repayment schedule. The borrower signs the agreement and makes a down payment. Lastly, the borrower makes monthly, weekly, or bi-monthly payments per the loan agreement.

Where to apply installment loans?

The most common place to apply for an installment loan is through a bank or credit union. However, there are a few online direct lender for installment loan that offer installment loans. It’s important to compare the options when looking for a place to apply for an installment loan. Borrowers must look at interest rates, loan terms, and repayment options. It helps them find the best loan for their needs. Banks and credit unions are great places to start the search for an installment loan. They usually have competitive interest rates and a variety of loan terms to choose from. To ensure they repay the loan comfortably, the borrowers must select a repayment schedule that works for them. Online lenders are another option to consider when looking for an installment loan. They often have flexible repayment options and competitive interest rates. Borrowers must consider their needs and what’s important to them when comparing options for installment loans. 

Who can apply for Installment Loans?

A few general guidelines must be met to approve an installment loan. These include:

  • Age: Most lenders only work with borrowers at least 18 years old. It is because federal law prohibits lenders from working with minors. Minors who wish to apply for an installment loan must use a cosigner like their parent. 
  • Gender: There is no specific gender that has a higher qualification chance. Borrowers of any gender qualify for an installment loan if they meet all the other requirements. These include having a stable income and not being a minor. 
  • Status: People of all statuses qualify for an installment loan if they meet the other requirements. Whether a borrower is married, single, employed, or self-employed, they all have an equal chance of obtaining an installment loan. 
  • Income: To qualify for an installment loan, borrowers must have a stable income source. The source of income is from a job, self-employment, government benefits, or other sources. The lender reviews the income to determine if a borrower affords the loan payments.

What are the documents needed for applying Installment Loans?

Proof of identity

Proof of identity comes from a driver’s license, passport, or other government-issued ID. It helps to ensure that the borrower is who they say they are. Without proof of identity, the lender is less likely to approve the loan or charge a higher interest rate.

Proof of employment:

Proof of employment helps lenders verify that a borrower has a steady income source. A steady income helps them make loan payments on time. There are a few different ways borrowers provide proof of employment. The most common way is to show the lender the most recent pay stub. Lenders use it to see how much money a borrower makes and help them determine whether they afford to make loan payments.

Bank statements

Bank statements are important pieces of information during loan applications. They determine whether or not a borrower qualifies for an installment loan. Lenders use bank statements to verify income and employment and assess a borrower’s ability to repay the loan. Bank statements allow lenders to check for red flags, such as frequent overdrafts or large cash withdrawals. These indicate financial instability.

Proof of residency

During the installment loan application, the lender requires proof of residency to determine a borrower’s eligibility. The lender needs to know that the borrower has a stable address and is not at risk of defaulting on the loan. Proof of residency includes a utility bill, lease agreement, or mortgage statement. Such proof allows the lender to process the loan application.

What are the factors to consider when applying for Installment Loan?

Interest rates

It is important for borrowers to know about the interest rate they pay before obtaining an installment loan. It is because they must afford the interest rates. A borrower cannot afford to repay an installment loan if the interest is too high. The interest rate must stay the same during the loan term so that the borrower budgets accordingly.

The repayment schedule

There are a few things to consider when looking at the repayment schedule. First, the borrower must make sure that the payments are affordable. They must look at their budget and ensure the payments are affordable. They need to consider a different loan option if they cannot afford the payments. Second, borrowers must ensure that the loan repayments are made on time. Defaulting on the loan leads to extra fees and interest rates. Borrowers who consider their repayment schedule find the best installment loans

Fees

Like any other loan, there are fees associated with obtaining an installment loan. These fees vary depending on the lender, the amount of money borrowed, and the loan terms. It’s important to consider these fees when comparing different installment loans. They sometimes add up and make a big difference in the overall cost of the loan.

Employment status

It is important to consider the employment status before obtaining an installment loan. A borrower’s employment status affects their ability to repay the loan. Employed borrowers have a steady income source that helps them repay the loan. Self-employed borrowers with a steady income qualify for installment loans.

When do Installment Loans need to be repaid?

Installment loan repayment schedules depend on the creditor, and the cash borrowed. Depending on the agreement between lenders and borrowers, most installment loans are repaid within a few months to years. Within the repayment period, borrowers make equal installments monthly. The repayment includes the interest rate agreed upon during the loan application. Lenders charge additional fees every time a borrower skips a payment. 

What are the Best Installment Loans?

There are a few different installment loans that are beneficial for different reasons. Here are four of the best:

Home equity lines of credit

A home equity line of credit, also called a HELOC, is a loan secured by the home’s equity. Equity is the difference between the borrower’s home’s appraised value and the amount they still owe on their mortgage. HELOCs are a great way to finance home improvements, pay off high-interest debt, or cover unexpected expenses. The interest rates are usually lower than credit cards or personal loans. However, HELOCs are a type of adjustable-rate mortgage so that the interest rate increases over time. 

Personal loans

Borrowers typically use personal loans for expenses such as medical bills, home improvements, or consolidated debt. Personal loans are unsecured, which means they do not need a borrower to have collateral. Due to it, personal loan interest rates tend to be higher than on a secured loan.

Auto loans

Borrowers use auto loans to purchase vehicles. The loan is typically secured by the car itself. The lender can repossess the car if the borrower defaults on the loan. Auto loans are typically repaid over some time, typically two to five years. The interest rate on an auto loan is fixed, which means that it does not change over the life of the loan.

Student loans

A student loan is designed to help students pay for post-secondary education and related expenses. Student loans are typically issued by government agencies or banks and are either need-based or merit-based. Need-based student loans are awarded based on the student’s financial need, as determined by the FAFSA. These loans typically have lower interest rates and more favorable repayment terms than other types. Merit-based student loans are awarded based on the student’s academic achievement or other factors. These include athletic ability or leadership potential. These loans typically have higher interest rates than need-based loans.

What are the Alternatives to Installment Loans?

Credit builder loans

Borrowers use credit builder loans to build their credit by borrowing a small amount of money and making timely payments. These loans are useful for people with little or no credit history. They help such people establish a positive credit history. Credit builder loans typically have low-interest rates. They are offered by banks, credit unions, or other financial institutions. An example of a credit builder loan is a secured credit builder loan. It requires the borrower to put down a security deposit, usually equal to the loan amount. The deposit is held in a savings account, and the borrower makes monthly payments to the account. 

Personal lines of credit

Personal lines of credit work in the same way as credit cards. It refers to the funds borrowers obtain for a given time (the draw period). Compared with credit cards, they come with no annual fees and lower interest rates. Borrowers use their lines of credit for debt consolidation, to pay for unexpected expenses, or even to take a vacation. It helps borrowers to save money on interest and use it for various purposes. Borrowers considering opening a personal line of credit must shop for the best interest rates and terms. One example is the Discover personal line of credit. Customers do not pay annual fees and enjoy a no-interest introductory APR for the first year.

Payday alternative loans (PALs)

Borrowers typically obtain (PALs) from credit unions. Pals come with competitive interests compared to pay loans. They are structured as installment loans with repayment periods of one to six months. They allow borrowers more time to repay the loan, unlike payday loans, where borrowers need to make balloon payments. Credit unions demand borrowers to be members for at least one month before applying for a PAL. Some require that borrowers have established a regular savings pattern with the credit union before applying.

Is a Mortgage an Installment Loan?

Yes. A mortgage is an installment loan repaid over time with a set number of planned payments. Most mortgage borrowers use the loans to obtain property, such as a house, which is the loan collateral. Mortgages are typically repaid over fifteen or thirty years, and borrowers repay them monthly. Mortgage interest rates are typically fixed, which means that it does not change over the life of the loan; it comes with fixed monthly payments, which means it does not change even if the interest rate does.

Does getting an Installment Loan raise your Credit Score?

Yes. Getting an installment loan helps raise a borrower’s credit score. It shows that a borrower is likely to make timely payments. Most lenders submit installment loan repayments to the credit bureaus. However, the loan plus interest must be made on time for this to work. Borrowers who miss or make late payments risk hurting their credit scores. 

 

 

 

 

 

Personal Finance Writer at Payday Champion

Kathy Jane Buchanan has more than 10 years of experience as an editor and writer. She currently worked as a full-time personal finance writer for PaydayChampion and has contributed work to a range of publications expert on loans. Kathy graduated in 2000 from Iowa State University with degree BSc in Finance.

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