Our opinions are our own. Here is a list of our partners and here's how we make money. You may even have an installment loan that goes by another name, like a mortgage. An installment loan is a lump sum of money that you borrow and repay in payments — or installments — over a period of time, usually months or years. Installment loans can be secured with collateral, like a car, or unsecured. Installment loans work differently than revolving credit — which you get with a credit card or home equity line of credit — because you borrow the funds all at once.
And installment loans give you more time to repay the loan, unlike payday loans that require full repayment from your next paycheck. Personal loans: Personal loans are installment loans you can use for almost any reason. A lender decides whether you qualify for a personal loan and at what rate using information like your credit history and score, income and other outstanding debts.
Unsecured personal loans are more common than secured personal loans, but some lenders let borrowers use a savings or investment account or a vehicle as collateral for the loan to potentially qualify for a lower rate.
Home loans: With a home loan, or mortgage, you borrow the value of the house and agree to repay it with interest in monthly increments, typically over 15 or 30 years.
In this case, the installment loan is secured by the home, and after too many missed payments, you risk losing it. A home equity loan — which is a second mortgage you might take to pay for home improvements — is also an installment loan. Auto loans: An auto loan is another example of a secured installment loan.
You borrow the cost of the vehicle and make monthly payments, plus interest, over two to six years. If you miss payments, the lender can repossess your car. Student loans: Student loans are installment loans because you pay them back in regular payments over time.
Applying for an installment loan typically requires a hard credit check , which can temporarily lower your credit score a few points. Beyond that, installment loans can strengthen your credit — as long as you make consistent, on-time payments.
Reputable lenders report on-time payments to at least one of the three major credit bureaus, Equifax, Experian and TransUnion. The consequences for missed or late payments can be severe. Most lenders have the option to set up automatic payments, which removes the pressure of remembering to pay.
Lenders use different methods for assessing your loan application and assigning your rate, so it can pay to compare installment loans from multiple lenders. Also consider other forms of financing, like low-interest credit cards or lines of credit, that may be less expensive, especially for big expenses. Getting pre-qualified for a personal loan or preapproved for a mortgage lets you see potential loan amounts, rates and payments without affecting your credit score.
You can then assess how the payments impact your budget. Boost your application. Variable rates are typically only worth choosing if you plan to pay off your loan quickly and can avoid potential rate increases in the future.
Higher credit limits than plastic: You can typically borrow more money with an installment loan than with a credit card. In many circumstances, if you need to make a large purchase, a loan could be a better option. But home equity lines of credit, which is a type of revolving credit—not an installment loan— could also come with a higher borrowing limit than credit cards. Installment loans can also have these downsides: Lack of flexibility: If you need to borrow a set amount—say, to buy a car—an installment loan is ideal.
For instance, those with excellent credit may be able to qualify for personal loans with interest rates as low as 4. Installment Loans vs. Revolving Credit Installment loans and revolving credit are two ways to borrow, but they work very differently. How Installment Loans Affect Your Credit As is true with any form of borrowing, taking out an installment loan can impact your credit either positively or negatively. If you make all installment loan payments on time, that will help strengthen your credit.
On the flip side, if you make late payments or fall behind and miss them, your credit will suffer. Credit mix: Having a mix of different forms of credit can benefit your credit score, too. If your credit utilization rate is already high due to large credit card balances or other loans, adding a loan to your credit file could cause your score to drop. How to Know If an Installment Loan Is Right for You Taking out an installment loan will both affect your budget and have a long-term impact on your credit.
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So what exactly is an installment loan? Unlike forms of revolving credit , such as credit cards or a line of credit, you must decide exactly how much money you need before borrowing the funds. After borrowing the funds, you then have to repay the installment loan over a fixed period of time, which you and the lender determine when you take out the loan.
Payments are typically monthly, but schedules can vary. The term of the loan is the amount of time a borrower has to repay a loan. For instance, a month term would allow repayment over six years. Many of the most common types of loans people take out are considered installment loans. Auto loans, mortgages, personal loans and student loans are all types of installment loans.
Auto loans are typically repaid in monthly installments over a range of 12 to 96 months, although not all lenders issue loans with terms within that range. Loans with longer terms often come with lower monthly payments, and higher interest rates, too. A mortgage is an installment loan used to borrow money to buy a house.
Mortgages are typically repaid over toyear terms with monthly payments.
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