First, what is an installment loan? An installment loan is one in which you borrow a set amount of money and agree to pay the lender back on a fixed schedule. The payment will include both the principal and an interest payment. These loans can be either secured or unsecured.
With a secured installment loan, the lender has a security interest in the property being financed. Common examples of a secured installment loan include homes and automobiled. If a borrower were to default on a secured loan, the lender could repossess the property in order to recoup their losses.
With an unsecured installment loan, you do not put any property up as collateral. The lender is simply allowing you to borrow the money based on your credit. If the borrower were to default on an unsecured loan, it would be a bit more difficult for a lender to recoup their losses but they would have legal options. For the purpose of this article, we will simply talk about some uses for unsecured installment loans.
Uses For Installment Loan
1) Debt Consolidation
If you have a lot of debt with various creditors, you can consolidate all of these debts into one simple loan. The benefits to this are numerous. For starters, it puts all of the accounts into one. This makes it simple to make your payments on a monthly basis. Rather than make six payments, for example, in one month, you make a single one. Much easier to handle.
Another benefit of debt consolidation is a reduction in payment. Most of the time, an installment loan will come with an overall interest rate deduction. This will result in a reduction of your monthly payment and potentially allow you to pay off your debt much faster. People do this all the time with student loans but it works with all types of debts.
2) Medical Treatments
You can also apply for an installment loan if you need or want to have a medical procedure. It could be used for both necessary and elective surgery. You can also take out a loan before or after services are rendered in order to cover the costs. You might take out a loan, for example, after receiving emergency care that you can not afford to pay in cash. This is not an ideal situation but a loan can help you get through your financial problem.
In addition to emergency medical bills, people also borrow to pay for elective surgery. This is done all of the time and people use the money to pay for things like plastic surgery or dental enhancements.
3) Home Improvement Projects
If you want to make some upgrades to your home but do not have equity or do not want to go through the process of a home equity loan, an installment loan will work. Depending on your credit rating, interest rates can be comparable to home equity loans with less work. Once you receive your money, you can use it however you see fit. Put in a pool, remodel that kitchen/bath or even put in an outdoor kitchen. People use installment loans to pay for all kinds of home projects.
4) Paying Off High Interest Cards
Installment loans are one of the best ways to get out from under high interest credit cards. Credit card debt is an epidemic in America and with average interest rates in the high teens, it can be hard to reduce this debt. This is where the installment loan comes in. You can pay off all of your cards with one loan and reduce your interest rate considerably. In most cases, your monthly payment will go down and you will pay off your debt much faster.
5) Dream Vacations
Saving up for that dream vacation can take years. In most cases, it is best to wait and save but in others, you might be better off taking out a loan. This could be because you want to take a vacation with an aging parent or you want to take your children on one last amazing trip before they go off to college or the military. Whatever the case, an installment loan can get the job done and if your credit is good, the interest rate will be low enough to provide an affordable monthly payment.
You only get one chance as a couple for a dream vacation. Whether you are the parents of the bride or the couple trying to finance the wedding themselves, a loan might be in order. Dream weddings easily go into the tens of thousands of dollars. That can be a huge financial hit and most people will not have that kind of money readily available. Take out a simple loan and have one less thing to stress about during the planning of the wedding.
Installment Loan Considerations
Whatever the reason for you to take out your loan, there are certain things that you must consider.
1) Interest Rates
Rates will vary from lender to lender and based on your credit score in addition to other loan interest rate factors. Consider your interest rate and how it will affect your payment and if the cost of the loan is worth it. This is particularly important when consolidating. You do not want the convenience of consolidating your debt to actually lead to an increase in your payment.
When looking at your interest rate, look at the APR. An APR or Annual Percentage Rate takes into account all loan fees and charges. It was created as a way to compare different loans that might come with different fees. Sometimes a loan could have a low interest rate but a much higher APR due to loan fees.
2) Loan Fees
Loan fees can drive up the APR of your loan, so be careful. Many loans, especially online loans, come with origination fees. You might take out a loan for 6000 dollars but have a 500 dollar origination fee. That will not only increase your APR but also lower your available loan funds to 5500 dollars.
3) Loan Terms
Look at the term of the loan and consider it as a factor in whether you accept a loan or not. If taking out a loan for a dream vacation, do you really want to be paying on it for ten years? That term might be okay for a pool loan but not for a trip to Disney World.
Lenders like to get tricky with loan terms. By stretching out a loan, they can bring a loan payment down, making it affordable to more consumers. The end result though is the borrower paying more money in interest because of the much longer term.
4) The Fine Print
Be sure to check the fine print and read your loan contract before you sign. look for things like a prepayment fee and fees for late charges. Is there a payment grace period or is it a hard due date? Does the lender offer online bill payment or will you need to mail a check in every month? These are things that are important because they can make the loan easy or difficult to handle during its term.