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What Is An Installment Loan?

installment loan
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An installment loan is a common type of loan used to buy a car, house, or other type of large purchase. You may be confused about what an installment loan is and when there’s a good reason to use it. Here is what an installment loan is and what to know about these types of loans before you borrow. 

How Installment Loans Work 

An Installment loan is a lump sum of money that you borrow and repay in payments or installments, over a period of time. That period of time can vary, ranging from months to years. They can also be secured with collateral or unsecured. Installment loans are different from credit or credit cards. Essentially, you are borrowing the funds all at once. You can’t get more money unless you apply for another loan. The best part about an installment loan is you get more time to repay the loan, unlike other types of loans like payday loans. 

Types Of Installment Loans 

Personal Installment Loans 

If you need a small personal loan you can use for any reason, this is your best bet. Available from $1,000 to $100,000 amounts, you can take out the correct one that you need. The repayment terms are about two to seven years. A lender will decide if you qualify for the loan depending on your history or credit score. There are a variety of other factors that could contribute to your qualifying score such as income and other outstanding debts. Unsecured personal loans are the most common because they don’t require collateral. 

Home Loans 

Arguably the most common type of loan is a home loan. Most people cannot immediately afford a house without a loan because it requires a huge chunk of money. Typically, you borrow the value of the house and agree to pay it with monthly installments over 15 to 30 years. In this case, the installment loan is secured by the home and you risk losing it if you don’t pay your loan. 

Auto Loan

Another secured installment loan is an auto loan. Because you are using a car as the collateral Essentially, you are borrowing the cost of a vehicle and making monthly payments on it, plus interest, over two to six years. Depending on the cost of the car, you would decide whether a longer term agreement would work vs shorter term. 

Student Loan 

The favorite of all the loans, a student loan. Unfortunately, school can be expensive and many people have to take out student loans to afford their tuition. Student loans are an example of installment loans because you are paying them off in regular payments over time. They can be fixed or variable rates. Depending on your eligibility you can take out a subsidized or unsubsidized loan. A subsidized loan is where the government pays the interest for you while you’re in school. However, you must be in school full time or a certain number of units to be eligible for the subsidized school loan. On the other hand, an unsubsidized does require you to pay interest on it while you’re there. 

Can Installment Loans Affect Your Credit?

We all understand how important credit scores are for the financial world. If you have a low credit score, it will affect things such as buying a home, taking out a second credit card, or qualifying for many different types of loans. When you apply for an installment loan they will most likely require a hard credit check, which can temporarily lower your credit score by a few points. Therefore, you should be very sure you are ready to take out an installment loan when you do, because it will ding your credit a bit. 

However, the good news is that you will be able to increase your credit score in the long run by paying your installment loan on time each month. Reputable lenders report on time payments to the major credit bureaus. Once these bureaus see that you are creating a good payment and credit history they will bump up your credit score! Make sure you are focused on paying on-time because a missed payment can lower your credit score of 50 to 100 points. 

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