Installment loans are one of the most popular types of loans available in the marketplace. Examples include automobile, mortgage, and personal loans. While each loan may serve a different purpose, they offer similar benefits for the borrower.
Read on to find out more about the benefits of installment loans.
What is an Installment Loan?
So, what is an installment loan exactly? An installment loan is a financial product that allows you to borrow a fixed sum of money. In exchange for the loan, you agree to repay the balance, plus interest, with regularly scheduled payments known as “installments.”
Installment payments are typically paid to the lender once a month and will be for the same amount for the duration of the loan. How much each installment payment will be is determined by three factors:
Principal – The amount of money borrowed and owed to the lender.
Interest Rate – A percentage of the principal charged by the lender.
Loan Term – The number of installments required to pay back a loan in full.
There is a direct correlation between the amount of the installment payments and the factors above. This means the more you borrow, the higher the interest rate, or the longer the loan term, the more each installment payment would become.
Benefits of Installment Loans
Installment loans allow you to pay for larger items over a specified time instead of upfront. But this is not the only benefit installment loans offer.
Installment Loans Can Help to Improve Your Credit Score.
Payment history accounts for 35% of your credit score. The fixed, predictable payments of installment loans typically make it easier for borrowers to plan and make their debt payments. When each installment is completed on time, it will positively affect your credit score. Additionally, as you make each payment, your total debt will decrease and improve your debt-to-income ratio, a measurement also used in determining your credit score.
Installment Loans Can Provide a Source of Emergency Funds.
When there aren’t enough savings to cover the cost of an emergency, an installment loan might be a viable solution. Auto or home repairs, medical bills, and other expenses can be paid using a personal installment loan, sometimes called an emergency loan. These loans may be secured or unsecured and are considered safer than payday or auto title loans. As you learn about how to get an emergency loan, you’ll find that they’re typically less expensive than credit cards, as they usually offer interest rates.
Installment Loans Can Help You Budget and Save Money.
It can be challenging to keep up with a monthly budget. But, because each installment is fixed, it is easier to stick to your budget and make your payments on time. And when you consolidate credit cards into an installment loan with lower interest, you can save money too.
Installment Loans Allow You to Choose How You Use The Funds.
With few exceptions, personal installment loans can be used for almost anything. Below is a short list of ways you can choose to use the funds:
- Auto repairs
- Medical bills
- Home repairs
- Debt consolidation
However, it is crucial to understand the terms of your installment loan before making certain purchases. For example, some installment loans can’t be used to fund a down payment on a home, pay for college tuition, or cover business expenses.
The Bottom Line
Installment loans have many valuable purposes and advantages beyond providing money when needed. Consider an installment loan from a professional lender if you’re thinking about borrowing money in the future. Their benefits can improve your credit score, help with budgeting, and even save you money in the long run.