If you need to finance a small or large expense, an installment loan should be on your radar. It can help you spread out the cost of more expensive purchases like a house, car, roof repair, kitchen remodel, vacation, or just about anything else you may have a need for.
Let’s take a closer look at how installment loans work as well as their benefits and drawbacks.
How installment loans work
Installment loans are loans you pay back through a series of monthly payments or installments over an agreed-upon term, ranging from a few years to several years or even longer. In most cases, they come with fixed interest rates that remain the same over their life.
Some of the most common types of installment loans include:
- Personal loans
- Auto loans
- Home loans
- Home equity loans
- Student loans
Pros of Installment Loans
The most significant advantages of installment loans include:
- Ability to easily cover expenses: An installment loan is a great option if you don’t have the cash to pay for an expense. You can spread out the cost of a purchase over time.
- Predictable repayments: Since installment loans typically have fixed rates, you’ll be able to budget for your payments in advance. You don’t have to worry about sudden increases that wreak havoc on your finances.
- Many options: There is no shortage of installment loans on the market. If you shop around for them at banks, credit unions, and online lenders, you’re sure to find the right loan for your unique situation.
- Chance to refinance: If interest rates decrease or your credit score improves, you can refinance your installment loan. This may reduce your monthly payments or shorten your repayment schedule.
Cons of installment loans
These are the greatest disadvantages of installment loans.
- Interest charges: Unfortunately, installment loans are not free. You’ll be on the hook for interest plus your principal or the amount you initially borrowed.
- Potential fees: Most lenders who offer installment loans charge fees in addition to the interest, which can increase your overall cost of borrowing. These may include origination fees, late fees, prepayment penalties, and closing costs.
- Will need to apply for another loan for more funding: An installment loan is not a revolving line of credit. This means you’ll have to apply for and take out another installment loan once you use up all your funds.
- Must meet specific requirements: There’s no guarantee you’ll get approved for an installment loan. Lenders often look for a particular credit score and debt-to-income ratio.
The Bottom Line
There are a variety of installment loans available. Therefore, it’s in your best interest to shop around and compare rates, terms, fees, and special perks. By doing so, you can find the ideal option for your budget and needs.
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of Moneyexcel or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.