When used effectively, installment loans can be an incredible tool in anyone’s personal finance arsenal. Chances are you know someone who has already taken an installment loan before or you’ve used one yourself. Despite the term’s unfamiliar and intimidating sound, it’s actually a common type of loan around the world.
Whether you get them through an online lender or at a bank, installment loans in Canada and other parts of the world can save you from large, unexpected expenses. Medical emergencies and car repair are only some of the many incidents that push the finances of people over the cliff. Of course, these are incidents that most people wouldn’t be able to save for. Well, even if it’s something that’s planned, like moving costs, it's still possible that your funds aren’t enough to cover the expenses. That’s when installment loans become of great help.
Read on below to learn more about installment loans.
What Are Installment Loans?
A form of consumer debt, an installment loan is repaid in regularly scheduled intervals over a pre-determined number of months or years. Under this loan category, credit unions and banks are the most active lenders. However, with the advancement in technology, online lenders are also now available.
Installment loans can be utilized to finance various purposes, including, but not limited to, funding everyday expenses, as well as debt consolidation. Also, some installment loans can be unsecured, which means that they don’t require any collateral, like a car, house, or any other physical asset. With unsecured installment loans, the repayment is guaranteed only by the borrower’s promise to repay.
Don’t confuse installment loans with payday loans as they’re two different types of consumer debt. Unlike the former, payday loans are short-term loans. Rather than getting repaid in multiple installments, they have to be paid off by the borrower as one lump sum. It’s essential to note that payday loans carry higher interest rates and involve smaller amounts when compared to installment loans.
How Can Someone Take Out An Installment Loan?
The borrower first visits the website or the storefront of the lender and discusses the terms of the loan. The purpose of the loan, loan amount, loan duration, down payment, and interest rates will all be tackled during the initial discussion. The borrower will only be required to fill out a loan application form (it can be done in-person or online) once the borrower agrees with the terms and is satisfied with the borrowing process. Besides the formal application, the borrower also has to provide their name, occupation, physical address, and other personal information. If the collateral is required, it should also be clearly indicated.
Then, the lender will initiate a loan evaluation process after receiving the application form. The evaluation's aim is to assess and determine the borrower’s ability to meet the loan obligations without encountering any problem along the way. If needed, evidence of current cash flows, collateral’s proof of ownership, recent financial statements, and other additional information may be required.
To get information about the borrower’s credit history, the company offering the installment may also ask for the credit report of the borrower. The application will be approved after a few days when the lender proves the creditworthiness of the borrower.
Note that there are online lenders that offer same-day loan approvals. Borrowers can also check them out. However, since online lenders don’t have physical stores or offices, it’s essential to search for reviews about the company first. Of course, the reviews or feedback must come from people who have already experienced the lender’s service. Look for video like
where a borrower talks about his experience taking out a loan from an online lender in Canada.
Once the application is approved, the borrowed funds will then be disbursed. When taking out an installment loan from banks and traditional lenders, the loan amount will usually be released in cash. With online lenders, the money will be sent straight to the borrower’s bank account. However, note that the lender can choose to reject the application if the borrower doesn’t meet the set standards. Another option that lenders can take for borrowers that presents a high risk is to offer installment loans at a higher interest rate as their way of risk compensation.
Common Purposes For Taking Out An Installment Loan
As already mentioned, installment loans can be taken out for various purposes. For instance, they can help with the following:
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1. Dealing with Unforeseen Events That Come with Costs
Covering of unexpected costs is one of the most common reasons why people take out an installment loan. A car might suddenly experience problems and stall in the middle of the road. An individual may need assistance to take care of costs for the surgery of a loved one because it’s not covered by their health insurance. An installment loan can help cover emergencies that people haven’t been able to save money for.
2. Buying a Motorcycle or Car
People also take out an installment loan to buy a motorcycle or car for their daily commute. Going for a loan helps in covering the upfront costs of purchasing a vehicle without draining an individual’s bank account.
Frequently asked questions
3. Purchasing a House
Most people don’t have the amount necessary to purchase a house outright. If your bank account doesn’t contain millions of dollars, installment loans are the only way for you to make your dream home a reality.
4. Enrolling in a Master’s or Doctorate Degree Program
Pursuing higher education can be costly. No wonder a lot of students who want to get a master’s or doctorate degree turn to installment loans to fund their academic journey.
5. Improving One’s Self or Career
The opportunity to invest in one’s self or career doesn’t come very often. That’s why people have to take every chance available. That could mean relocating to a new place or signing up for training courses. Of course, these things require an upfront investment. Since these can also be considered as unexpected expenses, chances are most people haven’t saved money for them. Sometimes, the only way to realize self or career improvement is to take out a loan and pay the borrowed funds back more slowly over time once the investment starts paying off.
With usually fixed and lower interest rates, using installment loans can be a better course of action when compared to getting other types of loans. The choice, of course, depends on each person’s preference and current situation. What’s most important is to carefully compare options in order to come up with a wiser financial decision in the end.
Different Types Of Installment Loans
Mortgages, auto loans, and personal loans are the most common forms of installment loans. Personal loans are easy to obtain, but usually have the highest interest rates. Even low-income consumers can take out personal installment loans. On the other hand, mortgages and auto loans often require borrowers to undergo an extensive vetting process to be approved. These types of installment loans are paid back over years or decades in monthly installments. They also require good credit standing.
Take a more detailed look at the different types of installment loans below.
1. Mortgages
People who want to buy a house take out a type of installment loan known as a mortgage. Borrowers of this type of loan are expected to make repayments every month until the borrowed amount is fully repaid. Mortgages typically come with 15- to 30-year maturity periods.
The interest payments and the future monthly principal remain constant in mortgages. That’s because they usually have a fixed interest rate. Fixed interest rate mortgages are popular, but an alternative is also gaining a foothold in the market, known as an adjustable-rate mortgage. With this alternative form of mortgage, borrowers will get a fixed interest rate for the loan’s initial term, but interest rates will then be allowed to fluctuate with market interest rates later on. Each of these types of mortgage has advantages and disadvantages, so potential borrowers have to weigh the pros and cons carefully before deciding on which to take.
2. Auto Loans
When purchasing a motor vehicle, the type of installment loan that people use is an auto loan. Depending on the loan amount and the lender, an auto loan’s duration can be from 12 to 60 months. What happens in this type of loan is that the lender will take care of the motor vehicle’s cost, and the borrower agrees to repay the amount that the lender provides in monthly installments until it’s paid fully.
Auto loans require collateral. The collateral is something that the lender will repossess and sell to recover the loan amount if the borrower defaults on their repayment obligation. For this type of loan, the vehicle bought using the funds from the loan becomes the collateral.
3. Personal Loans
Consumers use personal loans to finance discretionary expenses, such as weddings and vacations. Personal installment loans are also utilized to pay down credit card debt or consolidate outstanding debt.
Personal loans are a specific type of installment loans that are often confused with payday loans. However, in contrast to payday loans, personal installment loans can be used to work on building credit and other long-term financial goals. Payday loans are primarily used for financial emergencies.
Instead of accumulating credit card debt, some consumers prefer to take out personal installment loans. That’s because unlike credit card debt, personal installment loans don’t grow indefinitely if left unpaid, thanks to their fixed interest rate. However, it’s essential to note that the interest rates of personal loans can be higher for those consumers with poor credit.
The Relationship Between Bad Credit And Installment Loans
Credit scores are important. In the case of installment loans, they don’t only influence the rate you can get, but also your chance of getting approved for the loan. When applying for more costly or larger loans, bad credit scores become particularly harmful.
Among the three common types of installment loans, mortgages have the strictest requirements. That’s because houses require far larger loan amounts compared to motor vehicles or personal purposes.
A safe way of improving your credit is to take out personal loans. Among the three options for installment loans, personal loans can be the most stable, thanks to their fixed rates. They can be a low-risk avenue for getting and repaying debt.
What Are Collateralized Installment Loans?
Consumers must be aware that installment loans can be either non-collateralized or collateralized. The collateralized ones require an asset to be pledged by a borrower against the loan amount. For example, the motor vehicle bought using the loan becomes the collateral in auto loans. Similarly, the house becomes the collateral for a mortgage loan.
The borrower doesn’t fully own the motor vehicle or the house until they’ve fully repaid the borrowed funds. To determine if the value of the collateral is adequate for the loan amount, its value will be assessed at the fair market value first before the release of the installment loan.
On the other hand, non-collateralized installment loans don’t require any collateral. Lenders base their decisions solely on the creditworthiness of the borrower. They’ll identify the borrower’s ability to repay based on current cash flows and past credit history.
What To Consider When Taking Out An Installment Loan
Getting any type of installment loan is a decision that consumers should carefully make. It’s important for potential borrowers to assess their means. They have to make sure that the added cost of repaying the borrowed funds is manageable.
Debt can cripple people financially, mentally, and emotionally once they struggle to pay it off.
If installment loans make sense in your current situation, consider the time you have to repay it, the frequency and number of repayments, the interest rate, as well as any additional fees and restrictions.
Final Thoughts
When covering necessary and unexpected expenses or investing in one’s long-term potential, installment loans can be an excellent way to obtain the needed funds. These loans can increase anyone’s buying power and financial well-being significantly, as long as they’re properly managed. What’s most important is only to take out an installment loan that’s within your means. If you do things right, installment loans can help you keep your family financially fit.
