What is an Installment Loan?
According to a recent Forbes study, nearly 70% of Americans say that borrowing money improved their finances. 69% of respondents agreed that it made their financial situation better, while only 6% said that it made their situation worse.
In a pinch, a quick infusion of cash can save us money, stress, and other hassles in the long run. And one of the fastest and easiest ways to secure such an infusion is an installment loan. Personal loans, including installment loans, are among the most common borrowing tools.
Before we get too deep into the details, what is an installment loan? You may not recognize its name, but it’s simpler than it sounds. An installment loan is a type of personal loan that allows borrowers to obtain a set amount of money and repay it over a fixed number of payments.
Unlike other financial lifelines, like credit cards, an installment loan provides structure and simplicity by allowing you to determine how much you’ll need before you borrow. This extra step gives you time to build a financial recovery plan rather than borrowing blindly.
And it often saves borrowers from overborrowing, which can be difficult to come back from.
What is an Example of an Installment Loan?
Installment loans are called many different names. They may be marketed as personal loans, emergency loans, short-term loans, or same-day loans. But what makes a loan an installment loan is its fixed amount and repayment period.
For example, when obtaining an installment loan, a borrower might apply for a loan of $600 with a six-month repayment period. Another borrower might borrow less and keep the repayment period the same.
Spotloans are a type of installment loan and come in hundred-dollar increments from $300 to $800, allowing up to ten months for repayment. How much you borrow and how long you take to repay your Spotloan depends on your expenses, income, and preferences.
Other Types of Installment Loans
The structure, length, and flexibility of installment loans make them an attractive and common option for many borrowers. They are so common that you may even already have one (or have had one in the past) by a different name.
While they are some of the most common, personal loans are not the only type of installment loan. Auto loans, mortgages, and student loans are other common examples of installment loans. The amount is pre-set and payments are made over a fixed amount of time.
Examples of Uses for Installment Loans
The reasons for installment loans can vary greatly from borrower to borrower. One might use an installment loan to buy groceries or catch up on rent bills, bridging the gap between paychecks or jobs when money is particularly tight.
Another borrower might use an installment loan to cover unexpected expenses, like a cell phone repair or replacement, medical bills, or car repairs. And another still might take out an installment loan to help cover a large purchase, like a roof repair or a reliable pre-owned car.
Is an Installment Loan the Same as a Payday Loan?
These two types of loans are common enough that borrowers sometimes mistake one for the other, and they do have one important similarity. Both can get you the money you need on the same day that you apply for it. But that’s just about all they have in common.
As we mentioned before, choosing an installment loan means that you’ll have months to repay what you borrowed. A payday loan, on the other hand, comes with a much shorter repayment period - typically within two weeks.
When the initial repayment period is up, most lenders will let you roll over the balance. But this comes with fees that make it harder to catch up. Of the two, installment loans vs. payday loans, installment loans are almost always the better choice for borrowers.
What Happens if You Pay Off an Installment Loan Early?
Other lenders may operate under different rules, but at Spotloan, for example, we do not charge prepayment penalties. We don’t believe that a borrower should be punished for getting their finances in order faster than they had anticipated.
This means that with Spotloan, you may choose a repayment period of ten months but pay off your loan as soon as you’re able, without incurring fees for doing so. Many borrowers prepay if they find that their expenses were lower than they anticipated or they obtain an unexpected windfall, like a bonus at work or a delayed tax return.
What is an Unsecured Loan?
Someone in a tight spot with their finances might prefer to search for an unsecured loan. Unlike several other types, an unsecured loan requires no collateral. Spotloan is an example of an unsecured loan.
Rather than relying on the borrower’s assets, like their home or vehicle, an unsecured loan relies instead on credit. This makes it easier for many borrowers to obtain an installment loan when other sources are out of the question.
The Ups and Downs of Installment Loans
So far, we’ve discussed many of the pros of installment loans, including the ability to choose your repayment period, borrow enough to cover regular expenses or fund larger purposes, and obtain your funds on the same day. Many installment loan lenders will forego prepayment penalties as well. For example, Spotloan comes with no prepayment penalties, so you can pay your loan off faster, if that becomes an option for you. And finally, another advantage of installment loans is that borrowers with poor credit are often still eligible.
But no type of credit is all pro and no con. So, what are some of the downsides of installment loans? There are two that come up more than others. The first is that they may come with high interest rates.
The second is that installment loans aren’t open-ended, which means that you won’t be able to borrow more on top of the original loan amount. In the case of Spotloan, to secure additional funds, you’ll have to pay off the original loan first before you can apply for another.
Thankfully, the process becomes faster and easier once you’ve done it before. Some installment loan lenders, such as Spotloan, reward loyalty, taking special care of repeat customers by offering tiered interest rates that lower after repeat borrows. To ensure that an installment loan makes sense for your financial situation, it’ll be up to you to apply, evaluate the terms, and carefully evaluate your options.
Does Applying for a Loan Affect Credit?
Many borrowers worry that applying for a loan will seriously ding their credit. While it’s true that loan applications can lead to hard or soft credit inquiries, these dings aren’t permanent. Hard inquiries may stick around on your report for two years but often only affect credit for one.
And if that feels like a long time to wait, take comfort in the fact that, for most people, one credit inquiry often takes less than five points off their score. Most borrowers find that getting the funds they need is worth the small and temporary ding to their credit.
Then, there are a few other credit considerations once you’re approved.
How Do Installment Loans Affect Credit Scores?
With fixed repayment periods, installment loans allow borrowers to build strong payment histories. They may also help boost your score in the credit mix category by adding another type of account to your financial portfolio. Spotloans are often ideal installment loans for bad credit borrowers. They offer better terms than other options available to borrowers with imperfect credit scores, like payday loans. And with on-time payments, installment loans can improve your credit score.
Adversely, a late or missed payment to your installment loan can hurt your credit score. To prevent this problem, we recommend setting up automatic debit (ACH) payments if the lender allows for it. Automatic debits from your bank account are the easiest way to make sure your payments are made on time. In fact, 97% of Spotloan customers choose to make their payments using ACH because not only is it convenient, but it can help you save money over the life of your loan by helping you avoid missed payments.
If you prefer not to use an ACH payment option, some lenders will allow you to use your debit card and pay over the phone. In this case, we recommend setting a reminder on your phone or calendar each month to ensure you don’t forget to call in or mail a payment before it’s due. Finally, you can usually make a payment by mail using a check or money order. Your payment will be on time as long as the check or money order is received by your payment due date and your payment clears. Just remember that it can take your bank seven to ten days to clear your payment so be sure to plan your payment well in advance of the due date.
Online Installment Loans
We live in an age of convenience. From paying bills to ordering groceries, we can do most things online now. Obtaining a loan should be no less convenient than this. Online installment loans make it easy to apply quickly and securely and obtain the funds you need the same way.
The Spotloan online application takes an average of ten minutes, and your approval status will be communicated to you quickly thereafter.
