Are you familiar with the workings of an installment loan? While the term may seem new, you may have borrowed different types of installment loans. This post offers insights into installment loans, including their pros and cons.
What Is an Installment Loan?
An installment loan lets an individual borrow a set amount of money. Unlike revolving credit, such as a credit card loan, the borrower borrows the money all at once. Thus, one must know beforehand the exact amount of cash they need to borrow. Having borrowed the funds, one then repays the personal loan over a fixed duration. Although the payment schedule can vary, it is usually monthly. Each monthly payment is known as an installment and includes a portion of the principal amount and interest on the debt. Notably, most installment loans have a fixed, predetermined payment amount. Thus, the installment amounts may not change over the loan term.
The following are typical types of installment loans:
- Auto loans – repaid in monthly installments
- Mortgages – a form of installment loans for buying a home
- Student loans – for financing education goals
Pros of Installment Loans
Predictable Payments
The primary benefit of installment loans is that they come with predictable payments. In this case, you will know the payment amount and the schedule beforehand. Especially when you take a fixed-interest-rate loan, the components of your personal loan will remain unchanged until you pay off the installment loan. Therefore, it becomes easier to budget for the loan payment. As such, you are less likely to miss out on payments due to unforeseen changes since you can plan accordingly.
Confidence in Borrowing
An installment loan gives the borrower more confidence when taking a personal loan. Typically, the borrower understands the total amount borrowed, the monthly payment installments, and the loan duration. Therefore, one knows that the debt can be paid off at a given time upon making specific monthly installments. When you clear the installments, then the loan is fully paid off. As such, you can get a loan that you can repay within the shortest time possible without the risk of incurring extra debt.
Early Payments
There are no restrictions for paying off the loan before the end of the term. Thus, you can pay off the loan much earlier and save on interest charges with proper planning. However, there may be penalties for early payment. Nevertheless, the penalties are less than the total interest you save.
Cons of Installment Loans
A significant disadvantage with installment loans is that you cannot add the amount you need to borrow upon getting the loan, like a credit card. Thus, you will need to be sure about the amount you need to borrow. However, this restriction can reduce the risk of being caught in a debt cycle. In addition, installment loans depend on your credit score. Therefore, one must maintain a high credit score to avoid paying higher interest rates on the loan.
Ultimately, installment loans offer convenience and flexibility due to the high levels of predictability. Nevertheless, make sure you understand the terms and conditions of the different personal loans when making an application.
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