An installment loan is a loan that is paid back by the borrower in regular installments. The debt is repaid in equal monthly payments that include a portion of the principal and the interest. It is a favorable type of consumer financing for large-ticket products such as appliances and cars. The consumer benefits from financing costly items at interest rates that can be lower than credit card rates. The retailer or seller benefits through increased sales, while the lender can charge higher interest rates on installment debt than can be charged on other loans.
What Are the Problems of Installment Loans?
Installment loans have in many ways replaced payday loans as regulators crack down on abuses in the payday loan industry. Some states don’t allow payday lenders to operate within their state borders, or have caps on the interest rates. Generally, new regulations and rate caps don’t apply to installment lenders. The result is that in many areas of the country, installment loans are the new payday loans. But installment loans aren’t always better than payday loans.
Installment loans have a nominal interest rate, the APR (Annual Percentage Rate) that the lender promotes. But these loans also have multiple forms of credit insurance and added fees. Many borrowers are not aware these insurance policies (like credit disability insurance and credit life insurance and ) are optional. The result is that the borrower agrees to finance the loan along with the insurance policy. This adds to the borrowing amount, resulting with the effective interest rate, for example on a $500 loan higher than advertised.
Additional issues? Installment lenders allow borrowers to renew their loans. When an installment loan is renewed, the lender givesback a portion of what was already paid, taking their percentage for insurance payments and fees. The borrower walks away with a little cash, but the loan starts again, with new fees. Installment lenders make money from folks with loan renewals This can lead to a debt spiral.
Installment Loan Benefits?
Installment loans are helpful for numerous reasons. These loans enable you to:
- Borrow the money you need easily and quickly if you meet the criteria
- Borrow small or large sums of money, depending on your particular requirements
- You can choose how much money you can afford to pay back monthly before committing to the loan
- You can borrow over a longer stretch of time so you can pay the money back easier
- Enjoy more flexible terms than with other types of unsecured loan
Which Borrowers Benefit from an Installment Loan?
An installment loan is a very popular lending method that many people have used for a variety of needs. With an installment loan,borrowers are allowed to make payments over the life of the loan until the balance is paid. There arenumerous kinds of installment loans from mortgages to auto loans. With so many different loan types available, they help a lot of different borrowers get the money they need. Here’s a few type of borrowers that can benefit from installment loans:
Young People – A common group that uses installment loans regularly is young people. Many who are just getting started in the working world, sometimes do not have enough money to buy whats needed. They require an installment loan so that they can get the things they want. As an example, most young people are going to be starting a career and need transportation. Unless they have saved several thousand dollars, they may need to get an installment loan on a car to get them to and back from work. Installment loans allows them to make small, manageable payments on a monthly basis rather than saving up the money it would take to buy the car.
Financially Intelligent – Financially savvy borrowers are a group of borrowers that use installment loans. Many in this category have plenty of money and they got it by being smart. When you can get an installment loan for something that you need at a lower interest rate, it may be to your advantage to use it. For example, let’s say that a borrower in this category has $100,000 in savings and wants to buy a home for $500,000. The mortgage interest rate is 4.5% and this group is aware of an investment that pays them 5% on their money. They would be better to keep their $500,000, keep the rest in savings if they want and invest part of it. They can get a mortgage and get the house that they want. They are making more money off of the interest than they are being charged with the mortgage. These kinds of strategies would allow them to grow their wealth and stay in good shape financially.
Retirees – Great candidates for installment loans are retirees. Many retired people living on a low, fixed income may have an annuity or a pension paying them a fixed amount of money each month. They may be trying to live on small retirement plan and Social Security. If they need to buy a car or another big-ticket item, an installment loan can help them afford the monthly payments and get what they want.
What Is the Difference Between a Payday Loan and an Installment Loan?
A Payday Loan or Cash Advance is a short-term loan where the borrowers pays a one-time fee based on the amount borrowed. An installment loan can provide more money at one time, and offers the borrower an opportunity to repay the money over a longer period of time. Not every state offers installment loans. The payment terms are based on the payday schedule.