What is an installment loan?
An installment loan is a loan that usually has a fixed amount over a fixed monthly repayment schedule. Each repayment is an installment, hence the name. The majority of loans are a type of installment loan.
How does it work?
You decide on the amount you would like to borrow and, if accepted by a lender, you repay it back over a set number of months or years until the loan is repaid. Interest is added to the loan on a monthly basis.
To be considered (negative points/risks)
- APR and terms are largely based on your credit score. If your credit report is far from spotless, you may struggle to be accepted or may suffer higher interest rates if you are accepted.
- Some lenders may charge you fees for applying or charge a fee if you wish to pay the loan back earlier than agreed.
- It may be cheaper to look for a 0% credit card if borrowing a low amount and paying the full amount off before you get charged.
- Do your research- can you afford it and have you got the best deal available to you?
- If you take out a secured loan, your home or vehicle may be repossessed if you do not keep up repayments.
- With a fixed rate loan, you can be confident that you will be able to budget better as you will pay a set amount every month.
- Once the loan is paid off by the specific date agreed between you and the lender, your debt is settled.
- You have the freedom to use your loan for the purpose you choose such as: extra cash, a holiday, car repairs, home decorating etc, rather than, for example, car finance loans having to be used only on a car purchase.
- From a small to a large amount and short to longer repayments, installment loans can be a great help in a lot of situations.