Are you looking into all the different ways that you can borrow money and wondering if an installment loan is right for you? Here is what you should know about this method of borrowing money before you decide to move forward with getting a loan.
What Is An Installment Loan?
An installment loan is any type of loan with a set payoff date or term length. This is very common when you secure financing for a big purchase, such as a car or a home. You will pay a set amount of money each month towards that loan, and if you make those payments every month, you will pay off the loan in its entirety by the end of the term length.
Installment loans are quite the opposite of revolving loans, where you are allowed to make minimum payments every single month and there is no definitive payoff date. This is like when you borrow money with a credit card, where the loan could in theory go on indefinitely until you make payment higher than the minimum payment.
What Is The Difference Between Secured And Unsecured Installment Loans?
When you get a secured installment loan, it means that there is some type of collateral as part of the loan. If you are using the installment loan to make a purchase for a specific item, such as a car or home loan, usually that item is the collateral. This means that the item can be taken back if you do not make payments towards the loan. Unsecured installment loans do not have any associated collateral with them.
Why does the collateral matter? Any loan that has collateral will come with a lower interest rate. If you do not pay off your car loan, that car can be taken away from you and the lender can get their losses back. With an unsecured loan, such as a payday advance, there is nothing that the borrower can do when you do not pay the loan back. They can charge you late fees and interest, but it is not easy to recover those losses. That is why unsecured installment loans often have a much higher interest rate.
When Should You Use An Installment Loan?
The best situation to use an installment loan is if you need to make a big purchase and want to pay a low-interest rate on it. You probably don't have the cash to pay for the item in full, so you can secure the lowest interest rate with an installment loan by using the item you're purchasing as collateral.
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