While only a minority of people have irreparably bad credit, a large number of Americans have bad credit.
However, most lenders realize that even people with bad credit deserve a second chance and should be able to own a house or car, or take out a loan. One of the ways that people who have a spotty credit history get the money they need to thrive is through the help of installment credit.
If you're new to the world of installment lending or installment loans, we've got the guide to explain everything you need to know.
In This Post:
Understanding Installment Lending
While some people seek out payday loans when they're in a credit emergency, installment loans are a less risky option. When you take out a payday loan, you're expected to pay everything back all at once. With an installment loan, you run less of a risk because you can pay back incrementally, on terms that you agree to in advance.
Once your loan has been disbursed, an installment loan's principal balance is fixed. It's not an open line of credit or revolving credit like a credit card. You can't just keep borrowing until you reach your limit.
Your repayment plan is an agreement between you and your lender. The conditions can change if you both agree on them, but in most instances, you'll pay back a portion of your loan on a monthly basis. You'll cover the monthly portion plus an agreed upon amount of interest calculated all at once.
If you take out $2,000 at a 15% interest rate over a year, you'll be paying $192 every month. Your final payment is going to be around $2,300. In most cases, if you pay it off the day after you get your loan, you'll still have to pay the full loan plus the calculated interest.
Finding Installment Loans
There are a number of standard loans that fall under this type of structure. Student loans, mortgages, and car loans are all technically installment loans that are fairly easy to find. However, if you're not using the money for a specific purpose, it's going to have very different terms.
In this case, you're more likely looking for a personal loan. Banks, online lenders, and credit unions all offer these types of loans. Credit unions are community-based nonprofit organizations that give you lots of flexibility on your loan terms in exchange for your investment in the community.
Before you sign up for any loan, you should compare rates from multiple lenders. There is a wide variety of criteria to judge your loan by.
Not only are you going to want to get a loan amount that works for you, but you'll also need a competitive interest rate. Be sure to ask whether the rate is fixed or variable. Ask for details about the repayment plan and the fee structure if you miss a payment or want to pay in advance.
Expect lenders to look carefully at your credit history and how much debt you have before they lend you anything.
Why to Choose an Installment Loan
Like any other kind of loan out there, you have a set amount of money that you need to pay back by a specific time. If you fail to do so, you're going to be charged with fees.
Think carefully about whether or not the reason you're taking out your money is worthy of your effort. It might not be worth the effort of paying back the interest.
Outline what you're looking for from your installment loan before you commit. If you're just looking to have some spending money for a vacation, it might not be worth the effort. If it's going to take you a few years to pay off a small amount of money, then you should consider other alternatives.
However, an installment loan is perfect for tightly budgeted people who know that they could pay it off easily with the right terms. If you're looking for a loan that you can pay off just a little bit at a time, then an installment loan is perfect for you. If you can afford the monthly payment easily, then take out the loan to get the money you need to thrive.
As long as your choices are bringing you closer to your financial goals, you should be confident in your decisions.
What to Look out For
Remember that no two lenders are alike when taking out a loan. While a great benefit of this type of loan is that you can pay it off incrementally, failure to pay on time could greatly impact your overall debt.
There are loans out there that have super high-interest rates over a short repayment schedule with tight terms that equal high fees. If you don't have a strong credit score or steady income, some lenders might be willing to offer you a loan with instant approval. In exchange, you'll be trapped in a tough spot where you owe a lot of money over a schedule that you can't meet.
Look into alternative lending sites or peer to peer lending before you go to a lesser known lender. Go with someone who has good reviews online, whose representatives feel trustworthy, and who offers terms you can understand. The more jargon that their contract is laden with, the more likely they could be out to drain your bank account for the next few years.
Installment Credit Gives People a Chance
While installment credit shouldn't be the first option for people with good credit, it's a powerful solution for people who don't have good credit. If you're looking for a way to reach your financial goals, installment credit can offer you hope.
If you have bad credit and are looking for a home loan, check out our guide for tips.