There are many types of loans out there that are suitable for different kinds of needs.
Each type of loan has its own set of requirements, terms, finance charges, and other fees. These loans give us the financial leverage that we need in order for us to avail something that we cannot using our savings.
A personal loan is a general type of loan that is designed to help you meet current financial needs.
Personal loans are usually applied for in order to finance a wedding, travel, medical emergencies, home repair, a large purchase, or any other purpose. The amount is usually not sufficient though for a car or home purchase. Installment loans actually form a subset of personal loans.
What is an Installment Loan?
An installment loan refers to unsecured loans that are short-term in nature. The interest rates for installment loans are quite high specifically because that it is unsecured. The interest rates are not as high as payday loans though. Unsecured loans are those loans that are not secured by a collateral.
The determining feature of an installment loan is that the repayment is done over an agreed-upon period, the amount of which is divided into equal amortizations or installments. There are, of course, loans that require you to pay the entire amount on the maturity date, like your credit card bill on its due date. Installment loans would
require you to pay equal installments per month until you are able to pay the principal amount plus interest and fees.
Installment loans versus Payday loans
It’s best to compare installment loans against payday loans as they have features that truly differ. With this, you will be able to know what really type of loan is best for you. Both installment loan and payday loan are the best choices for immediate financing for amounts that are not too high, the question is just as to which one’s features are best for you.
Payday loans are small and short-term financing options usually for a maximum of $1000. It is a credit solution for those without stellar credit histories. The repayment is in lump-sum and is usually targeted on your next payday. As its market is usually those that do not qualify for other kinds of loans, payday loans are easier to get qualified for but carry higher interest rates. These high rates are deemed unconscionable by some states, and thus illegal.
Installment loans, on the other hand, are usually for relatively higher amounts of money (as much as $100,000) that are paid for in longer periods (as low as 3 months, and as much as 60 months), and in installments (usually monthly).
How does an installment loan work?
Installment loans start with your application for it. Once approved, you are given the amount you borrowed, and you are contracted to pay for it on specific dates and specified amounts.
That’s the gist of it, but the process would actually take longer. Before you get approved, you will have to undergo background checks for the banks to determine your ability to pay, and how to reach you and demand you to pay should you default your payments. This investigation would also determine how much the bank would lend you.
There are also numerous documentary requirements that would complement the background checks. The usual documents are categorized into proof of financial capability, proof of address, and proof of identification, all giving the bank the opportunity to know who they’ll lend to.
The good thing about installment loan is that it offers loans for people with bad credit and even with people with poor credit history.
When should you apply for an installment loan?
There are many different ways for which you can spend the proceeds of your loan. You can use it for house repair, for a gadget or appliance purchase, for getting your dream car or house, for a grand vacation – whatever your heart desires. However, you should be aware that lending money is an obligation, and it entails extra costs because of the interests and fees. With this thinking, you should know that your loan should go for something beneficial, like your studies, your emergency needs, or maybe as capital for a small business.
Besides, you loaned the money because you don’t have the capacity to pay for something upfront using your savings. So don’t waste away your loan – use it wisely.
Abby Whitmer is an independent e-commerce business owner from California. She’s a finance advocate and blogs to different sites about money management and tips about online business.