Even though you’ve probably interacted with installment loans before, you still might find yourself asking “what is an installment loan?” This kind of loan makes up the bulk of both commercial and personal loans that are extended to borrowers. Essentially, an installment loan is any loan that’s repaid via regularly scheduled installments.
Each time you pay on an installment debt, you’re both repaying a part of the principal amount that you borrowed as well as the interest on your debt.
Interested in learning more? If so, then continue reading and we’ll walk you through everything you need to know!
The Basics of Installment Loans
Personal loans, mortgage loans, and car loans are all popular types of installment loans. While mortgage loans are sometimes variable-rate loans, pretty much all other installment loans are fixed-rate.
A fixed-rate loan is one where you are expected to pay the same amount of money for every installment. The benefit of a fixed-rate loan is that you can better plan out your finances.
The Installment Loan Process
In the installment loan process, the borrower fills out an application with the lender. This application usually states the reason for the loan. The lender will then go over the different borrowing options.
Applying online is also a possibility with many lenders and makes the process even easier.
After you receive your loan, you’ll have to pay off a minimum amount every month, including interest. Once you make all of the necessary payments, the loan will be completed.
Be aware that if you pay off your loan too early, you might actually have to pay a fee.
Advantages and Disadvantages
The best part of an installment loan is that they’re so flexible. You can easily get terms that match your ability to repay the loan.
Essentially, you can get a loan that lasts a long time and comes with lower monthly payments. Or, if you’d prefer, you can get a loan that lasts a shorter time but will likely have higher installment payments.
However, with an installment loan, you might end up paying an interest rate on a fixed-interest loan that’s higher than a future market rate. You’re also locked into a financial obligation for a long duration of time.
The Importance of Knowing What Is an Installment Loan
Over 100 million Americans took out a personal loan last year. Because installment loans are so powerful and useful, it’s important to know what is an installment loan and how it works. When you do that, you’ll be able to make more informed and confident financial decisions.
Just make sure that you’ll be able to pay off the loan according to its terms, so you don’t end up in more debt.
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