As much as we all enjoy paying cash for everything and remaining debt free, it’s not always possible. An installment loan makes it possible to have the things you want or need without having to come up with a large amount of cash. Learn everything you need to know about installment loans as well as how to apply for them both at lending institutions or online.
Bonus read – How to Apply for a Personal Line of Credit
Understanding the Installment Loan
Installment loans are the ones that provide you with cash you need to make purchases or pay off debts. In most cases, you will need something to present as collateral. In this way, the bank has a guarantee that it will get its money back in case you can’t pay. As the name indicates, this type of loan is repaid by making monthly installments. The terms of these loans may be for just a few months or up to 30 years.
Limits and Amounts
Because there are so many different types of installment loans, there are also many limits and amounts a consumer may borrow. Typically, the limit is set at or near the value of the collateral you’re putting up for the loan. For instance, if you’re borrowing money to purchase a car, the car’s value should be more than or at least equal to the amount of the loan.
This online calculator may help you decide on an amount. It provides you with information on what your payments would be based on different amounts, interest rates, and terms. Factors like credit scores, income-to-debt ratio, and ability to repay also play a part in determining the loan limit.
What Types of Installment Loans Are There?
• Car loans – you can use them for purchasing a car. They offer terms from six to 72 months.
• Student loans – they provide students with money to pay for college. The student usually doesn’t need to start repaying it until he or she is out of college.
• Personal loans – you can use them for whatever you desire. However, they do require collateral.
• Mortgage loans – you can use them for purchasing a home. They offer higher limits. terms up to 30 years, and lower interest rates than other loans.
• Small business loans- you can use them to start up or purchase a small business.
• Unsecured loans – they do not require collateral, and they have higher interest rates and lower limits. Banks generally only approve these loans for customers with excellent credit.
How to Apply for an Installment Loan
Below are the steps for applying for your loan, which actually starts before you even contact a lender.
• Know your financial situation. One of the first things the lender will do even before you apply is run your credit scores. They wish to determine your debts and payment history. If possible, it’s advantageous to get a copy of your credit report a month or two before applying. There may be errors on the report or old debts you wish to repay. If so, you will have plenty of time to correct them. The lender uses an income-to-debt ratio to determine your ability to repay the loan.
• Get the required documents. Whether you apply online or at your local bank, you’ll need to provide certain documentation. The sooner you can provide it, the quicker you’ll get the loan. Here is a short list of what you will need.
- Social security card
- Driver’s license
- Proof of income
- Proof of employment
- Financial statement if applicable
• Apply for the loan. You can fill out an application in person or apply online. There are many online options for installment loans. The application will require you to provide personal information, including name, address, place of employment, type of income, and references. You’ll also need to sign the application, either in person or digitally. This gives the lender permission to retrieve any information that he may need.
• Get preapproval. If you’re getting a loan to make a certain purchase like a car, you may want to get preapproval for a particular amount of money. If you’re preapproved, you can go shopping for what you want to purchase and know the exact amount you’ll need. Why waste time shopping for something that’s beyond your financial means?
• Open an account. Most lenders require you to have an account with them before they give you a loan.
• Wait for approval. Sometimes it may seem like you’re waiting forever to hear from a lender. You can either contact the lender or track the process online. This is the benefit of already having an account with an online lender.
• Look over and sign the documents. Make sure you read all the loan documents so you don’t have any surprises later. If there is anything you do not understand, this is the time to ask questions.
• Determine how you want your funds. Inform the lender how you want your loan proceeds (check, money order, cashier’s check or direct deposit) and give the approval.
How Does Repayment Work?
You can repay this type of loan via regular installments, hence the name installment loan. The amount you owe on your payments will depend on the amount of your loan and the interest rates the bank is charging you. Again, the online calculator can help you here.
If you’ve received the loan from your local lender, you can make the payments in person, by mail or online if they have a website. If you got your loan through an online lender, you may be able to make the payment online or by mail.
Most lenders offer an automatic payment option. This is when they take the payment out of your account on a certain day of the month. Many consumers like this option because they don’t have to worry about making the payment. This also means that they will never be late with their payments. Making timely payments is a positive thing for your credit scores.
FAQ We Know You Have
Below are FAQ many consumers have prior to getting an installment loan.
Q. Where is the best place to get this type of loan?
A. If you have a local bank where you do most of your financial transactions, you may want to start here because you may get better terms if you’re already a customer. There are also many online lending institutions just waiting to help you.
Q. Is there a way I can tell what my payments or interest rates will be before actually getting the loan?
A. If you’re doing business with your local bank or credit union, you can call them and ask what type of interest rates they’re currently charging on loans. If you’re considering getting the loan online, the online calculators can offer you various scenarios so you can select terms and amounts.
Q. Will I pay less in interest and finance charges if I pay the loan off early?
A. Since interest rates and finance charges are compounded over the life of the loan, you’ll save if you pay the loan off early. Paying it on time will also eliminate late fees.
As you can see, the process of getting an installment loan is relatively simple once you know exactly how much you need or want. Getting a loan where you can make installments is a great way to make purchases that you wouldn’t otherwise be able to afford. It’s also a good way to build credit if you currently don’t have credit or have poor credit that you want to improve. If you have other concerns, additional questions or tips regarding the installment loan that we have not covered here, please feel free to contribute to this overview.