If you want to read in a very simple language then installment loans are consumer loans that would be paid back on a fixed schedule. Mostly installment loans would be used to repay previous debts, finance purchases like houses and cars and strengthen your credit situation. To understand how they work, let’s first have a look at different types of installment loans.
Types of installment loans
Though you may take installment loans online for any need of yours there are three types of installment loans that are most prevalent. They are personal loans, mortgages and auto loans. Let us have a look at what each one of them means.
These are taken by consumers when they have to repay an old debt or manage their credit card dues. You take such loans to facilitate a wedding, vacation or any such personal need. They are slightly different from payday loans which are taken for financial emergencies. Personal loans are taken to build a strong credit base. People take it when they see their credit card is huge and repaying it in one go would be taxing on the resources.
Home mortgages are another form of installment loans that are readily available. They are taken in a range of amounts over $100,000 and you have to repay them over a period of 15 to 30 years. Before providing this loan the lenders see your financial history and credit score and that determines the interest you would have to pay on it.
Auto loans as the name suggests may be used for the purchase of a new car. Same as mortgages these are long term loans and approval is totally dependent on the financial history of the applicant.
Here also you have to pay a certain amount of collateral and down payment. In fact, collateralized loans mean that the vehicle would go back to the lender if payment is not done in the stipulated time.
Mostly the duration of auto loans ranges from 24 to 48 months however 72-84 month plans are also being approved. Though the installment, in this case, is less eventually the applicant ends up paying more than the actual price.
Things to Know Before Choosing an Installment Loan
Before you finalize installment loans online, you would have to understand what all factors are crucial in making the right decision.
- Term of the loan– The term of the loan is the duration in which you have to pay the entire amount back. These loans can have a term of six months to five years and maybe more totally dependent on the kind of loan you are looking for.
Credit card loans do not have any fixed term but there is a credit limit cap that you cannot exceed. Those who take the payday loan repay and again take a fresh loan after two months or so. This is because the loan interest amount payment is more than the principal amount taken.
- Credit rating– Installment loans are another way to build a strong credit history for yourself. By repaying each installment on time you ensure that the credit score remains high which proves beneficial in other ways too.
- On the flip side, if you continue increasing the credit card or revolving credit balance your credit score would move downwards which would not be a good sign.
- Interest rates– Loan interest rates of this category may range from 6 to 36 % and you can always negotiate a lower rate with the lender. An average credit card interest rate is around 13.64% which cannot be changed.
The payday loans can be extremely high and that is why it is always advised to avoid taking one. The interest rate charged is dependent on your credit score and other financial aspects.
- Monthly payment– In an installment loan, you need to pay a fixed amount every month until the total amount is not returned. In the case of credit card loans, you can borrow any amount and the payment per month would also differ.
You can make a minimum payment every month however that means that the interest would increase and you would have to pay more amounts by the end of it.
How You Can Negotiate Lower Loan Payments
As discussed above, it is better to negotiate on the installment amount for such loans. Here are some overheads that you can negotiate upon.
- Total amount– When you decide to take a loan, first analyze how much amount you need at that point. Use a loan calculator to figure out different principal and rate scenarios to find one that is the most suitable.
- Loan rate– Obviously the lender would suggest you a particular loan rate but that does not mean that you have to abide by it. You can negotiate with him or ask him ways in which you can get it reduced.
- Fixed or variable rates– Variable interest rates give you an opportunity to take advantage of lower payments. That means when the interest rate is low, you get to pay a lesser amount of money.
- Secured or unsecured loans– If you take a secured loan you get the benefit of a lower interest rate. Apart from that you can also repay the whole amount early and save one few interest payments. However, you need to discuss with the lender in advance.
- Payment penalties– Find out what kind of penalty is imposed on you in case you default on the payment. It is better to know this so that you make sure not to falter.
Taking an installment loan reduces a lot of financial burdens that you may be facing. However, before taking the plunge it is always good if you understand everything that goes behind securing one. To avoid any mistakes read the terms and conditions carefully and be open to negotiations. Most firms are ready to compromise a bit on the rates provided you furnish them with a guarantee of timely payment. Your credit score also proves to be a deciding factor in the final decision of the lender.