Installment Loans: Types and Tips

Thank you for your question about installment loans.

There are many different types of loans and credits, including installment loans. Although mortgage loans, student loans, and auto loans can be referred to as installment loans, it is very common to refer to smaller loans such as payday loans, debt consolidation loans, or retail purchase loans as installment loans. Whenever you shop for a loan, make sure that you understand the terms of the loan including the interest rate, the fees (upfront, monthly and/or, special fees), the repayment dates and sums, and the consequences of not meeting a payment.

In order to help you find the installment loan that best suits financial situation, learn about:

1. Installment Loans: Short Definition
2. Installment Loans: Different Payment Plans
3. Installment Loans: Tips

Installment Loans: Set Principal Payments

Your lender sets up with you terms to repay your personal loans. This includes repaying the principal, interest and fees associated with the loan. Repayment schedules vary greatly, but the two main types are installment and revolving payments.

• Installment: You can repay your loan over a set amount of time with pre-determined principal payments and accrued interest. Installment payments include secured loans such as mortgage loans and auto loans and unsecured loans such as student loans, personal loans, debt consolidation loans, and retail store loans. You can purchase many items, such as computers, with fixed monthly payments (subject to interest rate fluctuations).
• Revolving: You can repay the loan or credit with flexible monthly payments, including a minimum payment to cover interest and some principal. The most common form of revolving credit is your credit card. However, banks and credit unions also offer revolving lines of credit, both unsecured personal lines of credit and secured HELOC (Home Equity Lines of Credit).

Installment Loans: Different Payment Plans

Installment loans have a variety of payment plans. The monthly payments will vary depending on these variables:

• Interest Rate: Fixed Interest Rate or Variable Interest Rate (often tied to the Prime rate or the LIBOR rate).
• Term: Short-term personal payday installment loans can be from a few months. Auto loans are generally offered up to 5 years. Student installment loans are from 10-25 years. Mortgage loans are offered up to 30-40 years.
• Type of Payment: Installment loans generally come with fixed payments, which will vary if you have a variable interest payment. Some installment loans have grace periods where all or part of you payment is deferred.
• Fees: Many installment loans have upfront fees, and some have monthly servicing fees.

Student Loans are definitely a type of installment loans, although they have special payment terms. Most student loans have a deferment option while you are in school. Afterwards, your accumulated interest is added to your principal, and repaid in monthly installments. Federal student loans have more options including forbearance (you can push off payments) and income based repayment schedules.

Here are a few examples of installment loan payments:

One other type of installment loan is an online installment loan, or an online payday installment loans. Payday loans are offered for short terms (usually for up to a month) and are paid back from a direct payment through your bank account. They come with high fees. Depending on your state’s regulations, some payday loan or cash advance loans are available for up to 4 months, paid back in monthly installments. These loans are very expensive! They come with very high fees, typically about $20 for every $100 borrowed, and that is for a very short term. That means that you don’t pay an annual interest fee of 20%, rather your real cost of money is closer to 300% p.a.

Installment Loan Tips

Installment loans, if use wisely, can help you get an education, buy a car, buy a house, or purchase a large appliance. If used incorrectly, then you can get into a financial mess, missing payments, which will harm your credit score and possibly lead to collection calls and lawsuits.

• Installment loans and your credit score: The most important element of your credit score is timely payments. So don’t take out any loans that you cannot afford to pay on time. Another element in your FICO credit score is your credit mix. By taking out different types of loans, including revolving credit (credit cards) and installment loans (student, auto, mortgage and personal loans) AND paying them on time you will increase your score.
• Installment loans and budgeting: Before you take out any loans or credit, make sure that you can afford the monthly payments. Create a monthly budget and monitor your expenses and income. Your budget will help you figure out how to save money, cut expenses, and plan your monthly debt payments. Lenders traditionally look at your credit score and your DTI (debt to income ratio) to determine if you are eligible for a loan. If you take on too many loans, then your monthly debt payment will be too high to qualify for a mortgage loan or other loans. You will also have increasing financial expenses.
• Installment loans and debt consolidation: One alternative to deal with debt problems is to consolidate debt with a personal loan. Those loans will be expensive, even if you have good credit and take it from a major bank, a credit union or a peer-to-peer lender. If you have bad credit, then installment loans (or payday loans) will be prohibitively expensive and usually exacerbate your debt problem. Before taking a loan to consolidate your debt, check into other debt relief options such as credit counseling and a debt management plan (consolidates payments without new credit) or a debt settlement program. I strongly advise to stay away from payday or short-term installment loans; unless you are sure, you can pay back the loan, use them very infrequently, and carefully balance the costs of the loan. Don’t dig yourself deeper into the hole.