Essentially, an installment loan refers to a personal or commercial loan that is extended to a borrower with the condition to pay back with regular installments or scheduled payments. Every such installment that is paid contains some amount of the actual principle owed and some of the accumulated interest. Every installment in an installment loan is determined by a number of factors including how big is the loan, what is the time duration to pay it back, what is the interest rate, your credit history, etc.
A typical example of an installment loan is an auto loan, a mortgage loan, a personal loan, and a commercial or business loan.
Other than some installment loans which feature a variable interest rate, almost all other types feature a fixed interest rate through the loan’s life. This interest rate is determined at the onset of when the loan is taken, and doesn’t change over the time period of the loan’s payment. This means that the amount to be paid on a regular basis, usually a monthly basis, remains the safe over the life of the loan’s payback.
How can one get an installment loan?
Individuals can get installment loans through a number of channels. the first obvious channel would be their local banks and financial institutions. a lot of micro-finance companies have also been setting foot in the installment loan market. individuals can also get installment loans online through a number of digital channels and entities. If you want to apply for an installment loan online, you can click here to begin.
What is a collateralized loan?
A collateralized loan is any installment loan that features a collateral attached to it. In case of non-repayment, the bank can cease the collateral and put it under its name. Generally, a mortgage and an auto loan are collateralized. In a mortgage loan, the home or property for which the loan is taken is collateral and in an auto loan the vehicle for which the loan is taken is collateral.
Installment loans that do not have any collateral attached to them are called uncollateralized loans and often personal loans do not feature a collateral. Any installment loan that is given without a collateral is based upon the borrower’s credit history and credit score. A credit score checks the borrower’s ability to pay back the loan as accounted for by their history and their assets in the bank. If an individual’s credit history is bad and they still want a loan without collateral, their interest rate is typically higher than that of their counterparts.
How Does The Installment Loan Process Work?
The first step in the installment loan process happens when s borrower applies for an installment loan. This application is initiated by the borrower and starts with them specifying why they need the loan and what do they need it for.
In the second step, the bank reviews their application and discusses payment options that the individual may use to repay the loan amount. If the installment loan id regarding a mortgage or an auto loan, the bank also discusses any possibilities of a down payment.
In the third step, the lender then checks the borrower’s credit history and their credit rating. This determines how safe it is to give the individual a loan, and also determines how accommodating the lender is going to be in terms of the loan’s credit terns and payments.
In the fourth step, if the loan request is entertained and accepted, the final payment terms are decided and the loan is agreed for.
In the subsequent steps, the lender makes necessary and regular payments to the bank. In order to save up on the interest rate and its charges, individuals can also pay back the loan prior to completion of its duration and save up on some money. However, certain loans also feature a clause that stops early payment and lenders in such loans cannot do so.
There are a number of other fees involved too which include one-time general processing and administrative fees, or late payment fees in case the lender defaults one or more of the scheduled payments.
What are the pros and cons of installment loans?
Installment loans have their pros and cons and have certain advantages and disadvantages. A major advantage of installment loans is that they are very flexible and their terms can easily be negotiated with the lender in terms of payment details and other intricacies. They can be tailored to the borrowers needs easily.
Another advantage of installment loans is that by knowing pre-determined payments that you are supposed to make every month, you can schedule and budget yourself accordingly to avoid any mishaps or surprises. It can be thought of as a bill instead of a repayment and hence help you manage your cash flows in a better way.
A major disadvantage of installment loans is that the borrower may be required to pay a higher interest rate at a later time even of the interest rates in the market are lower because the interest rates were fixed when the loan wad initially taken.
Another disadvantage is that the borrower finds themselves in a financial obligation that they cannot get rid of even if they face a financial loss in their business. If the loan involved a collateral, they would have to do away with any given collateral too in this process.
While installment loans may seem as a great way to pick up pace on your poor company or personal cash flows, borrowers shouldn’t think of them as an easy way to finance their lifestyle. Many individuals mess up and end up taking a lot loans without having any backup to how they are going to repay those loans. in such cases, individuals may find themselves having taken a decision too fast that they may end up regretting later on.
Whether it is for your personal self or for running your company’s operations, individuals should carefully analyze what activities do they need the loan for and then spend their money carefully only on those activities and on nothing more nothing less.