An installment loan is a loan that you repay over time with fixed, regular payments. This differs from a traditional loan, which requires borrowers to pay back the entire amount at once when the loan is due. These loans take on many different forms, including mortgages, credit cards, and auto loans.
This article will provide an in-depth overview of everything you need to know about installment loans, including how they work, the pros and cons of using them, and what to watch out for.
How do installment loans work?
An installment loan is a loan in which you borrow money and repay the principal and interest in fixed installments over a set period. The term “installment loan” typically refers to personal loans, such as car loans or mortgages, but can also include other loans, such as student loans.
The advantage of a personal installment loan is that it provides borrowers with a predictable monthly payment schedule, which can help them budget for their expenses. They also tend to have lower interest rates than credit cards or payday loans.
Borrowers should be careful to read the terms and conditions of any installment loan before signing up, as there may be penalties for late payments or missed installments.
Who offers installment loans?
Since there are so many different types of loans paid by installment, many different lenders offer them. These include:
Banks and Credit Unions
Banks and credit unions offer many different types of installment loans. These include
- Mortgages: a mortgage is an installment loan where the borrower wants to purchase property, such as a house or apartment. This is a type of secured loan, where the property is held as collateral until the loan is closed. These loans are typically repaid on a monthly schedule.
- Car loans: a car loan is an installment loan taken out to purchase a car. Similar to a mortgage, car loans are repaid over time, usually with monthly payments
- Home equity loans: a home equity loan is an installment loan in which the borrower takes out a loan against the equity in their home. Some of these loans require monthly principal repayments, though others can be interest-only.
- Personal loans: Banks and credit unions can often offer personal installment loans for a variety of purposes, depending on what you need. A personal loan is usually unsecured, meaning that they aren’t tied to collateral that you own (or are about to purchase).
An online lender is a company that offers online loans through its website. These lenders typically loan more modest amounts than you might see from traditional financial institutions. Typically, monthly installment loans are paid back over a shorter time frame, from a few months to a couple of years.
SkyCap falls into this category and offers cash loans to borrowers in the form of online installment loans. If you need a loan, check out our services page or apply directly from the sidebar of this post.
Car Dealerships / Department Stores / etc…
If you’ve ever taken out a car loan from a car dealership, you’ve taken out an installment loan. In this case, instead of cash, you’ve taken possession of a vehicle instead. This is one of the most common types of loans that people have.
Similarly, if you’ve ever shopped in a major department store, you’ve likely been asked about store credit (i.e. credit cards) or installment plans to elongate payments. These loans also fall into this category where you receive a product in advance while paying for it over a specific period.
Debt Consolidation Agencies
These agencies are financial institutions that specialize in debt consolidation loans. This means they will pay off a borrower’s existing debts and issue a single new loan, typically with lower, fixed interest rates and a defined loan term. These types of loans can be beneficial and help you consolidate debt and create manageable repayment schedules.
Payday loans are often a loan of last resort for borrowers. These loans come with very high-interest rates and are typically used by people who cannot get a loan from a traditional bank or alternative lender. Proceed with caution and understand the terms before agreeing to a payday loan.
Is a credit card an installment loan?
No, a credit card is not an installment loan. A credit card is an unsecured revolving loan that allows the borrower to purchase products or services now and pay for them over time. Credit cards typically have high-interest rates, meaning that they can be expensive if you run a balance. On the other hand, installment loans usually have lower rates and provide borrowers with a more predictable monthly payment schedule.
Do installment loans hurt your credit score?
No, installment loans do not typically hurt your credit score. In fact, installment loans can help to improve your credit score by demonstrating your ability to make regular, on-time payments. Installment loans can also help you build up a history of good credit, which can be helpful in other areas of your financial life.
However, if you don’t abide by the terms of the loan (i.e. missed payments or even a total default), they can hurt credit reports.
At SkyCap, helping rebuild your credit history is important to us. Our loans are approved quickly and can help you rebuild your bad credit. We offer competitive rates and will work with you to help stabilize any poor credit situation you might have.
Why you would want to take out an installment loan
There are many reasons why you may want to take out an installment loan. Perhaps you need money to cover an unexpected expense. Maybe you need help rebuilding your credit score. Or maybe you just need to make a large purchase and spread that cost out over time.
Whatever your financial needs, if you’re considering taking out an installment loan, it’s essential to understand the advantages and disadvantages of this type of lending product as a short or long-term financial solution.
You can also check out SkyCap University, our free program that gives you all the tools you need to help educate yourself on loans, credit, and everything in between. It may even help you lower your interest rate on a SkyCap loan!
The pros and cons of installment loans
As with any significant financial decision in your life, taking out a loan that will require you to sign up for monthly payments has both pros and cons.
Here’s a quick list of the advantages of an installment loan:
PRO: They can help rebuild your credit score
As we wrote in our definitive guide to credit scores, one major factor in determining your credit score is paying your bills on time. So taking out an installment loan and, most importantly, not missing any payments will help to increase your credit score over time.
PRO: They can have lower interest rates than other types of loans
Installment loans often have lower rates than you would find with other types of credit like credit cards or payday loans. This can help you save money in the long term, assuming you stay current with your payments.
PRO: They create certainty for your monthly budget
When someone takes out a loan, it’s usually to fund a large purchase like a house, car, or wedding. With installment loans, you get fixed monthly payments that allow you to pay off the total amount (plus interest). This type of consistency can make it easier to budget while still enabling you to make the large purchase you need.
That said, there are also some disadvantages that you should be aware of:
CON: They can be expensive
Depending on the details of the loan (lender, interest rate, term, etc.), installment loans can end up being more expensive. Make sure you read the fine print and understand what you are signing up for before taking out the loan.
CON: They can be challenging to get approved for
If your credit report is a mess and you have bad credit, it can be tough to get a loan. Many lenders require you to have a minimum credit score that isn’t in “poor credit” territory. They may also want you to have a reasonable debt-to-income ratio as a signal that you are more likely to repay in full. This is why we work with people who have bad credit and help them get loans they might not otherwise be able to get.
CON: They can damage your credit score if you don’t make timely payments
As mentioned before, credit scores can go down if borrowers take out loans and don’t pay their monthly installments on time. If you are planning to take out a loan of any type, ensure that you have a plan to pay it back without hurting your credit report.
How to get an installment loan
So you’ve read everything we’ve had to say about installment loans, and you are ready to get started? Here’s what you need to do next
Check your credit score
Before you even think of taking out a loan, do a personal credit check by accessing your credit report. You can do this with the major credit bureaus for free. The ones you want to check in Canada are as follows:
Remember, these credit bureaus are regulated by federal law. While they are for-profit businesses, they are required to fix any incorrect data that may be on your report. Be sure to check for accuracy and correct issues before applying for an installment loan online or at a bank/store.
Compare interest rates
While the rate of interest that you pay is often a competitive angle that lenders use to lure you in, it’s essential to find the best one for you. While it can potentially be the one with the lowest interest rate, make sure you check for hidden fees or lock-ins to ensure you don’t get a bad deal. Even if you find what you think is the best loan for you, check other lenders to you don’t miss out on a better deal from lenders you haven’t heard of before.
Select a loan
Many lenders have different options for their loans, including the term, the amount, the interest rate, and the repayment terms. Look over all available options and choose the one best suited to your specific situation.
Research lenders and start your credit application
There are many different lenders, from banks to credit unions to online lenders. If you need a loan fast, we can save you some time. Check out our application page to get started and save a bunch of research time.
Read and sign the contract
Ready to get started? Make sure you read the contract and terms to understand what you are getting. Verify the loan amount, the repayment terms, any fees (such as an origination fee or prepayment fees), and any other special terms before signing.
Installment loans can be a great way to finance a large purchase, as they often have lower rates than other types of loans. But like any financial product, it’s vital to do your research before applying.
Want to learn more about the loans that we offer? Check out our services page for more information.