Installment Loans: What Are They & Are They Right for Me?
April 23, 2019
The financial world can be stressful and confusing, but it doesn’t have to be. You can take comfort in the fact that there are essentially two types of loans in the world: installment loans and revolving credit.
To put it simply, installment loans allow you to borrow a set amount of money all at once and then repay the loan with fixed payments. Meanwhile, revolving credit—most commonly used with credit cards—is credit that is automatically renewed as debts are paid off.
Learn more about installment loans and if they’re right for you.
What are installment loans?
Installment loans are a common type of loan. Unlike credit cards or other lines of revolving credit, you must determine a set amount of money to borrow for an installment loan. Then, you pay a certain amount on a specific schedule (often monthly). These monthly payments are known as installments.
Basically, the term “installment loan” can apply to any loan where you pay back the loan over time on a fixed schedule with regular payments.
Most installment loans are fixed-rate. This means that the interest charged over the loan term is fixed at the original time of the loan, so your monthly payment remains steady.
However, there are some variable-rate installment loans. This typically applies to mortgage loans.
What are the common types of installment loans?
- Car loans
- Student loans
- Personal loans, like medical bills or debt consolidation
The benefits of installment loans
Installment loans can be incredibly beneficial for large financial investments like paying for a home, a car, or a college education.
Benefits of installment loans include:
- Predictable payments: Because you pay the same monthly payment (or installment!)—especially if you have fixed-rate interest—installment loans are easy to anticipate.
- Simpler budgeting: Since the installments are predictable, installment loans make it easy to build into your monthly budget and plan ahead for future expenses.
- An end date in sight: Each installment loan is unique, but when you determine your loan amount and monthly payment, you’ll also set an end date for when the loan will be paid off in full.
What to watch for
While installment loans have plenty of pros, there may be some cons. Every loan is a personal decision and you should weigh variables like your income, existing debts, and upcoming expenses when deciding whether to take on any loan.
Here are some things to keep in mind when you’re considering an installment loan:
- Fixed amount: Since installment loans are set for a fixed amount to borrow, you can’t add onto the loan like you can with revolving credit.
- Your financial health: Your credit score, income, and debt-to-income ratio can all impact the installment loan terms you receive. A lower credit score or outstanding credit card balances can mean you have a higher loan interest rate.
Are installment loans right for you?
Installment loans are flexible, predictable, and can be tailored to the amount of money you need now and what you’re able to pay. Also, installment loans typically have lower interest rates than revolving credit, which allows you to keep more cash on hand for other expenses.
Whether you’re looking to make a large purchase or consolidate debt, an installment loan could be the right choice for you. If you’re interested in installment loans, chat with the expert team at Illinois Lending. We’re happy to help you on your financial journey.