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Understanding Installment Loans

Installment Loans

An installment loan is a loan that is repaid gradually over a set term with a set number of payments. These payments are usually scheduled at monthly or yearly intervals. Interest, as well as a part of the principal amount is included in the monthly payment. Most loans, including mortgages and other types of financing are installment loans and are generally easy to understand. Installment loans are a manageable way to receive credit while not accruing exceptionally high interest or face a higher risk losing property in case of a default.

What are poor alternatives to installment loans?

Short term loans are almost always poor alternatives to long term installment loans. These loans will feature high, compounding interest rates or the use of valuable property as collateral. These loans also do not consider credit scores and instead charge exorbitant interest rates to compensate for the increased risk. A payday loan, for example, is usually used to cover expenses in anticipation of a paycheck. Theoretically, the paycheck would then be used to quickly pay off the payday loan. The interest rate and fees will be high for using this service and several jurisdictions have imposed limits on the fees that can be charged on cash advances. The Annual Percentage Rate on these loans average approximately 650%, reflecting the short nature of the loan and the need of the payday loan provider to make a profit. One can expect to pay almost $25 - $30 per $100 borrowed under this arrangement.

A title loan usually refers to using a car as collateral for a loan. The car owner is usually loaned up to half the market value of the car, but if the repayment deadlines are missed, the car may be seized and sold to cover the amount owned by the borrower.

Short term loans are usually predatory and count on many individuals being unable to repay their loan in a timely manner, leading to skyrocketing interest rates and potential loss of property. These loans should be used as a last resort, not only due to their exploitive nature, but also high element of fraud associated with these enterprises. Short term loan organizations have been known to charge interests far beyond the legal limits set by the state, as well as engage in practices such as automatically renewing loans without the consent of the borrower, or forcing customers to waive their right to take legal action in exchange for the loan.

Why should I consider an installment loan?

You can predict how much you will end up paying with an installment loan. Unlike credit cards, you will not add more debt to the principal, nor will the interest rate fluctuate dramatically, lessening the urgency to repay the loan. Contrast this to title and payday loans where failing to repay the loan in the short term will cause the amount owed to increase dramatically. Most of the most sable, secured credit options today are installment loans, such as car financing and mortgages. Research you installment loan provider thoroughly for complains, terms and conditions as well as the pricing and interest rate arrangements.

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