If you need financing for a major purchase like a new vehicle or home renovation, then an installment loan can be a great choice. In this post, we’ll explain what is an installment loan and the steps involved with finding a great deal.
What Is an Installment Loan?
An installment loan is an umbrella term used to describe any lump sum of money that a lender will give you in exchange for equal monthly payments. Interest rates are usually fixed which helps make them very predictable and manageable.
How to Find a Good Installment Loan
As you learn more about how to apply for a loan there are a few steps to take when shopping around to ensure you get the best arrangement possible.
1. Determine Which Type You Need
Installment loans come in all shapes and sizes:
- Auto loans
- Student loans
- Personal loans
It will be important to pair the right type of loan with your specific need. For example, getting a personal loan to buy a home wouldn’t make sense because the interest rate would be much higher and your monthly payments would be too great. In this case, a mortgage would be the best loan for the job.
2. Check Your Credit Score
Your credit score, or FICO Score as it’s technically known, is a number between 300 and 850 that lets lenders know how creditable you are as a borrower. The higher your number, the better your chances of qualifying with top lenders and being offered the most competitive rates.
You can find out your FICO Score by signing up for a free account with Experian, one of the three major credit bureaus. Many major credit cards will also provide you with your FICO or Vantage credit score for free.
3. Calculate Your DTI
DTI or debt-to-income ratio is another metric that lenders will use to gauge your financial situation. This quantifies how many other debts you have relative to your income and can let lenders know if you’re prepared to take on this new payment.
Although numbers will vary, usually having a DTI below the 35 to 40 percent range is a good place to be. You can calculate yours by comparing your current income against your reoccurring monthly expenses.
4. Compare Lenders
There are thousands of different places to find a good installment loan. From well-known banks and credit unions to lesser-known online lenders, it pays to shop around and find one that’s competitive.
Be sure to do your research before going with a provider that has the lowest interest rates. Unfortunately, some bad actors pose as legitimate businesses, so it’s worth taking a few minutes to Google potential candidates and make sure there are no public complaints or bad reviews.
5. Read the Terms Carefully
Once you’ve found a lender that you’d like to work with, go through the terms and conditions with a fine-tooth comb. Small details like charging penalties for good actions such as making early payments are exactly the kinds of things you’ll want to avoid.
The Bottom Line
Installment loans are a great way to get the financing you need for major purchases. Start your process by determining the right type of loan you need, checking your credit score, and calculating your DTI. While shopping around, compare various lenders and be sure to read the offer carefully.