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An installment loan is simply a loan that a borrower receives in a single lump sum, then pays back for a certain period of time at certain intervals (typically monthly) and at a fixed interest rate. Your payments, or installments, won’t fluctuate and will be made up of both the loan principal and interest. Installment loans are also commonly called loans. Most general installment loans (in contrast to a car loan or a mortgage, for example) can be used for any purpose.
Installment loans may be secured or unsecured. A secured installment loan requires you to use collateral such as your house or car to guarantee that the lender will be paid back. If you fall behind on your payments, that means your lender can seize the asset you’ve designated as collateral.
For this reason, secured loans are much less risky for lenders. They may allow borrowers who don’t have great credit to obtain a lower interest rate than they would otherwise get without using collateral. Of course, this also means they’re riskier for you, since you may lose a valuable asset if you can’t make your payments.
In contrast, an unsecured loan requires no collateral. If you default on an unsecured loan, you won’t lose an asset — but you will still do serious damage to your credit. Unsecured loans are riskier for lenders since they won’t have much recourse to obtain payment if you fall behind. That means you may pay a higher interest rate, especially if your credit isn’t up to snuff this helps the lender manage the risk of making you the loan.
Searching for “installment loan” online will return mostly short-term, low-dollar lenders who pitch installment loans as the safer, more responsible cousin of payday loans. Unfortunately, they are much the same in practice. Here are some tips that will help you avoid these riskier kinds of installment loans:
- Search for loans, not installment loans. loans are installment loans, but the terminology hasn’t been hijacked by predatory lenders. You may find that simply reframing your search leads to more reputable results.
- Avoid lenders who push loan renewals. Constant loan renewals are a cash cow for unscrupulous lenders, who know that you’re paying mostly interest or other fees at first. The more frequently you renew your loan, the more money goes in their pocket and the more dependent on the loan you become. Remember, reputable lenders do not want to drag you deeper into debt. They want you to borrow only what you can comfortably afford to repay.
- Just say no to insurance add-ons. If your lender pushes insurance such as credit life insurance or credit disability insurance, firmly decline. These policies don’t protect you they just ensure the lender will get their money if you die or become disabled. They’re also expensive, and can boost your APR well beyond what state regulations may allow. However, lenders don’t have to include the cost of these policies in APR calculations,making your loan look far cheaper than it actually is.
- Steer clear of advance fees and guarantees. A lender may promise that you’ll be approved for a loan without checking your credit or other financial information that should be a huge red flag. They may also require an upfront fee another red flag. Reputable lenders will not charge you to apply for a loan, and they certainly won’t guarantee that you’ll qualify without looking at your credit score, income, and other financial obligations.
- Don’t work with high-pressure lenders. If you feel pressured in any way to borrow more money than you need, avoid shopping around, or sign loan documents before you feel ready, walk away. Some predatory lenders may even threaten to sue if you fall behind on payments unless you renew a loan.
- Do your homework and approach a lender on your own, not the other way around.Unscrupulous companies are more likely to suss out customers with calls, emails, postcards, and other advertisements. Legitimate lenders usually don’t need to go to these lengths.
Four Tips on Shopping for an Installment Loan
Now that you know how to avoid predatory lenders, here are some additional tips on how to get the best deal on an installment loan from reputable sources.
1: Shop Around
Installment loans are available numerous places, including banks, credit unions, online lenders, and short-term, no-credit-check lenders who may also offer payday loans or auto title loans. I’ve already discussed why the latter companies are bad news, but that still leaves you with plenty of places to shop.
It’s wise to see what installment loans your existing bank may offer before you consider other options. They may give you a low interest rate or favorable repayment terms in order to keep your business. Assuming you’ve built a history of responsible money management, they may also ease lending criteria if you need a bit of help. Credit unions are also worth a look if you’re unsure you’ll qualify at most big banks they are able to examine requests on more of a case-by-case basis.
Applying for a loan with online lenders is undeniably convenient and typically quicker than your other options, too. However, you may find that APRs are a bit higher online this is the price you pay for convenience.
2: Make Sure a Credit Card Doesn’t Make More Sense
In some cases, you might be better off charging a big expense on a credit card instead of using an installment loan. This is more likely to be the case if you have solid credit and a low APR introductory offer on your card maybe even 0% for a certain number of months. Of course, you need to be able to pay off the card before the interest rate resets.
If you need more time to pay off your expense or more money than your credit limit will allow you to borrow, an installment loan is likely your better bet. Though you may have to pay an origination fee, it will be easier to budget for a fixed monthly loan payment. Responsible use of installment loans can also boost your credit score, whereas charging and keeping large amounts on your credit cards can do the opposite.
3: Compare Fees
As mentioned above, it’s common for lenders to charge an origination fee for an installment loan. This could be anywhere from 1% to about 6% of the total loan amount. The stated APR of your loan should take this fee into account, but it never hurts to double-check.
You’ll also want to know whether your lender charges late fees, unsuccessful payment fees, or fees for paying by check. Avoid any lender that charges you a prepayment fee for paying off your loan early. Some lenders charge these fees because they make more money in interest if you need your entire term to pay back your loan. If your lender does charge a prepayment fee, ask for it to be waived and get it in writing.
4: Borrow for the Shortest Term Possible
What kind of choice you’ll have on repayment terms vary by lender some may require a certain term or only let you choose from two terms, while others will let you pick any term within a certain range (for example, one to five years). Spreading your loan over a longer term means your monthly payments will be lower, but it also means you’ll pay more for the loan sometimes significantly more because you’ll pay more in interest.
