What is installment loan? How does an instalment loan work? How can I apply for an instalment loan? An instalment loan is a type of funding that is used to buy a car, house or other large purchases.
Hence, you even have an instalment loan that goes by another title, such as a mortgage. Read no for more details on this.
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What is Instalment Loan
Instalment loans allow an applicant to borrow a predetermined amount of money, disbursed in a lump sum, that can be repaid over time. This loan comes with a fixed interest rate and requires regular monthly payments that remain the same for each month.
Hence, the portion of each monthly payment is applied to the principal amount borrowed and a portion is applied to the interest on the loan.
How Does Installment Loans Work
An instalment loan like we said before now, is a lump sum of money that you borrow and repay in payment. Furthermore, instalment loans can be secured with collateral, like a car or unsecured.
However, it is important to note, that this type of loan works differently than revolving credit. You can get more money without applying for a new loan. And this type of loan gives you time to repay the loan, unlike payday which needs full repayment from your next paycheck.
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Secured vs Unsecured Installment Loans
Most loans require the applicant to use collateral when they borrow. For example, an auto loan is secured by the vehicle you purchase. If you stop making payments, lenders can repossess the vehicle.
Home loans are similar, hence, allowing lenders to foreclose on your home. Therefore, if your loan needs collateral, it is simply a secured loan.
Unsecured loans do not require collateral. Most personal loans are unsecured loans, as such regarded as emergency loans.
This simply means there is no asset for your lender to take your belonging if you stop making payments. Instead, the lender may report late payments to credit bureaus and take legal action.
How to Choose the Right Installment Loan
To make the best decision on the type of loan to choose from you will have to consider certain factors. It can help to see the good and the bad. Here are some basic pros of instalment loans contains.
- Fixed monthly payments.
- It builds your credit score.
- Fixed interest rates.
- It helps diversify your credit mix.
This and many more are the pros of an instalment loan.
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What are the Types of Installment Loans
There are different types of instalment loans that would interest you to apply from. However, you should bear in mind that each type of instalment loan is a bit different, with unique fees, plus other features. Here is a list of loans that will interest you:
- Student Loans.
- Personal Loans.
- Credit Builder Loans.
- Auto Loan.
- Home equity loans.
This and many more are lists of instalment loans.
Is an Installment Loan Good?
Instalment loans can help improve your credit score by adding on-time payment history to your credit report. They can also broaden your credit mix, which is a credit score factor that considers the types of accounts you own. Hence, if you primarily use credit cards in the past. However, it is good you make proper enquiries before applying for a loan.
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What Happens if you Pay Off an Installment Loan Early?
Well, if you pay your loan off early, your history will reflect a shorter account relationship. The same is not true when you pay down your credit card. Hence, even if you pay your balance in full, the account opens and your credit line stays intact.
How are Installment Loans Calculated?
You will need to know your interest rate, the principal amount you borrowed and the term repayment. When you have gotten that information, you can use this to calculate your instalment (p = (r(1+r) ^n)/(1+r) ^n-1). Hence, where r equals your rate, n equals the number of payments and p equals the principle.
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Can too Many Installment Loans Hurt Your Credit?
Instalment loans will not negatively affect your credit score as long as you are paying your interest on time. That’s because when you first get a loan, credit agencies understand that the loan balance will be relatively high during the beginning of its lifetime. Hence, because of this, they forgive large loan balances.
How Does Installment Plan Work?
Well, when you apply for an instalment plan, the total amount of your purchase is automatically deducted from your available credit. Your monthly instalment amount is included in the minimum amount that is due each month. Hence, as you pay off the balance, the amount you pay is then added back to your credit limit.
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Is Credit Cards an Installment Loan?
Credit cards and Credit lines are examples of revolving credit. Hence, credit cards and credit lines are not the same as an instalment loan. Some examples of instalment loans are auto loans, student loans and personal loans.
What Happens if you Ignore Debt Collectors?
When you ignore or avoid a debt collector, it may make the collector use other methods to try to collect the debt, including a lawsuit against you. Hence, if you are unable to agree with a debt collector, you may want to contact an attorney who can provide you with legal advice on your situation.
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