Pros and Cons of Installment Loans

Pros and cons of installment loans

An installment loan is a lump sum you borrow and repay in equal amounts (installments), with interest, over a set time or term. Short terms last for less than a year, while longer ones are years long. Common examples of this type of loan include personal, auto, mortgage, or student loans. Installment loans may be secured (backed by collateral) or unsecured.

Read below to learn more about installment loans, including their potential advantages and disadvantages.

Who offers installment loans?

You can apply for an installment loan through online lenders, banks, or credit unions. These lenders take your credit score and history, as well as income and debts, into account. However, they differ in their additional qualification criteria, interest rate offers, customer service, and fees.

Pros

• Flexibility to use funds for many purposes. There is a variety of installment loans, especially personal loans, available that could help you cover anything from debt consolidation to home repairs and big events. Other installment loans have more specific purposes, such as auto or mortgage loans.

• Repay over time with predictable payments. Installment loans are repaid according to a fixed schedule (bi-weekly, monthly, etc.) and usually have fixed interest rates. You won’t be surprised by your payment amounts, they are easier to budget, and you know the end date of the repayment term.

• Credit score building. Payment history comprises 35% of your FICO score. If you make consistent, on-time payments, you may be able to improve your credit over time.

• Chance to refinance. In the future, if there’s an opportunity to get a lower interest rate or better terms on your loan, you could refinance it.

Cons

• You have to reapply or refinance if you need more funds. Installment loans are sent in a single amount, all at once. If you end up needing more money than what you got from the loan, you’d need to apply again — though some lenders streamline the process for returning customers.

• Interest rates are tied to an applicant’s credit score. With less-than-perfect credit or a thin credit history, it is more difficult to get approved for a loan. However, those who have credit challenges can find a co-signer to improve their chances of approval and may even be able to secure a better rate.

• Fees. You may have to pay an origination fee — a percentage of the total loan amount — when you take out a loan, which is deducted from what you borrow. Many lenders don’t charge pre-payment fees if you choose to repay your loan early to save on interest charges.

Is an installment loan right for you?

Consider the pros and cons above, as well as your unique financial situation. If your purpose for taking out an installment loan is to cover a one-time expense or consolidate high-interest debt to make payments more affordable, this could be a good option. But if your credit isn’t great or you need help paying for recurring expenses, getting an installment loan may not be the way to go.

Looking for a customized, convenient loan solution? A Lendmark loan expert can help. Stop by your nearest branch or apply online.