What Can They Be Used For?
There are many reasons why you might want to take out an installment loan. Perhaps one of the most common is to buy an apartment or house. This type of loan is usually referred to as a mortgage and it`s arranged over a long time span, typically up to 25 years.
During this time, you make regular payments to the lender and eventually your debt will be cleared.
Another very common reason you might need an installment loan is to fund the purchase of a car. You borrow the required amount from a bank or other financial institution and make regular repayments at fixed intervals for an agreed amount of time until the loan is cleared.
This type of loan would more usually be taken out over a period of up to five years.
How They Stack Up Against Alternatives
All this seems very straightforward and indeed it is. But in order to fully understand why installment loans are so popular and cost effective, you need to compare them with the alternatives.
Using a credit card is in fact a form of taking out a loan.
However, because the amount of credit you receive each month will vary, so will the minimum amount you are required to pay back. Also, with a credit card loan, if you only pay back the minimum amount stipulated each month, it will take a very long time to clear the debt.
Interest Rates
Interest rates charged on credit cards are typically much higher than those on loans, which will add considerably to the cost of the loan. What`s more, with a credit card, it`s all too easy and tempting to spend further each month, cranking up the total debt.
Payday Loans
Another type of loan that`s become more and more common these days is what`s called a pay day loan. If you need a relatively small amount, say $1,000, very quickly and only for a very short time, usually until your next salary payment comes in, you might consider this type of loan.
However, you should be aware that pay day loans come with a big health warning. If there`s any chance you might not be able to pay off the full amount by the agree date, you could end up in ever increasing financial difficulties.
This is because the APR or annual percentage rate of interest charged on payday loans is staggeringly high, sometimes as much as 500%.
Late fees and charges are also often levied if you don’t pay back the full amount of a pay day loan within the agreed timescale. For this reason, most financial advisors would caution against pay day loans except in very specific cases. Perhaps you need to meet an unexpected bill, such as for a car repair, or if your boiler breaks down.
You don`t have the necessary cash right now, but know you will have it when your pay is credited to your bank account.
Used correctly, pay day loans can provide access to short term, emergency funds, although they will never be a particularly cost effective way of borrowing money, especially when compared with installment loans.
Just to recap, an installment loan can be defined as a loan for a fixed amount, which you pay back together with the interest that accrues on it, in regular payments over an agreed amount of time.
Secured And Unsecured Installment Loans
However, installment loans can be further sub-divided into secured and unsecured loans. Each type has its pro’s and con’s and you need to fully appreciate how they differ if you are considering one or the other.
A secured loan means that the amount you’ve borrowed will be secured against something else you own, usually your home. In the event that you fail to pay back what you owe to the lender, they can take steps to gain possession of your home, which they will then sell to cover their losses.
So why would you want to risk losing your home, or something else of high value? Well, the fact is that any lender is much more likely to look favourably on you as a borrower if you’re willing to use your home or other valuable asset as a back-up.
Not only are they likely to lend you more, but you will also usually be charged a much lower interest rate.
With an unsecured loan, you’re not asked to secure anything against the amount you’re borrowing. Understandably, financial institutions are much more likely to have stricter lending criteria for this type of loan and if you have a bad credit history you may be turned down.
Furthermore, the amount they are willing to lend will probably be smaller and the interest rate will be higher.
How A Loans Calculator Can Help
When you’re considering taking out any sort of loan, you need to make sure you can afford the repayments and allow for them as part of your regular expenditure.
Use a loans calculator to help you work out exactly how you are going to do this
