An installment loan is a type of loan that features a fixed repayment schedule. The interest rate and monthly payment doesn’t change over the life of the term, creating predictable payments and zero surprises for borrowers.
These types of loans can be used for a variety of purposes, and while the specifics of these loans vary by lender, most installment loans are short-term, with borrowers repaying balances in less than two years.
Do you need immediate funds? Before you consider other options, learn how an installment loan can help you.
Longer Repayment Terms
If you’re short on cash, you may ask family for help or apply for a payday loan. These options can solve your immediate financial needs, but neither solution is perfect. A payday loan lender typically requires full repayment in two weeks, and if you borrow from a relative, this individual may request repayment within a few weeks. This can create problems, especially if you need longer terms.
An installment loan might work best in these situations. Although installment loans are considered short-term loans, they don’t have short repayment terms like payday loans. You can pay back the loan over several months, which takes the stress out of borrowing.
Improve Your Credit Score
Some people feel that one or two credit accounts in their name is enough to build a solid score. But with so few accounts, your credit score might plateau. It’s all about diversification. Not to suggest applying for several new accounts at once. However, adding an installment loan to the mix can help your score, as new accounts make up 15% of credit scores. Plus, paying off a small installment loan over several months adds positive activity to your credit report which can give your score a boost – just make sure that your lender reports to the three major credit bureaus.
Save on Finance Charges
Maybe you need home improvements such as new windows or an updated kitchen, or perhaps you’re planning your daughter’s wedding. There are many uses for an installment loan, and if you don’t have cash for an upcoming expense, these loans are often cheaper than using credit cards. This is because installment loans typically have lower rates – which can save you money. Plus, a fixed repayment schedule makes it easier and faster to pay off these loans.
Even if your credit card offers a competitive interest rate, it may not compare with the rate on an installment loan. The average credit card has an interest rate of 13%, whereas the average installment loan has an interest rate under 10%.