An installment loan is a loan where you agree to pay back a set amount each month for the length of the loan.
The loan term can be only a few weeks or as long as 30 years — how long depends on the amount given and the loan provider.
Installment loans are great for when you need cash fast. Most lenders don’t require excellent credit for loan approval, nor do they require you to secure the loan with any type of collateral (such as a car title).
The application won’t burn an entire evening away, and the turnaround time is pretty fast. It’s a go-to loan for when you’re in a pinch.
What are the different types of installment loans?
Most loans that people get are considered installment loans. Whether they’re car loans, mortgages, student loans, or unsecured loans, all of those are what we call installment loans because you are paying on the loan in clearly defined installments.
You know exactly how much money you’re going to need for each payment, and you know exactly when the last payment will be.
Installment loans are very rigid and orthodox because they have a:
- set amount
- set loan term
- set monthly payment
- and (most of the time) a set interest rate
How to Get an Installment Loan
The best place to always start shopping around for a loan is your local bank or credit union. The reason is that, if you already have a history with them, they’ll be much likelier to give you a good interest rate. So start there.
Once you’re given numbers, take your search elsewhere and compare your offers. Online lenders are a dime a dozen these days, and some are more trustworthy than others. By no means are a lot of them shady, but definitely do your research and read the online reviews.
Keep in mind that a lot of lenders have bad reviews from past customers; generally, ones who have had collections sent after them when they didn’t pay their bills.
People are never more inclined to leave a review than when they feel they’ve been jilted. So, read the reviews, but discard the ones where people are clearly just angry because they couldn’t put off payments indefinitely.
What is the highest amount you can get?
It depends on how strong you are financially. If you make a lot of money, have solid credit, and don’t have a lot of debt, you should be able to take a fairly large installment loan.
That said, many states have restrictions on the maximum amount you can take out, and it will also depend on the lender. Speedy Cash, for example, has a maximum online loan amount of $750 for people who live in Virginia.
A word of caution, however: just because you’re approved for a certain amount doesn’t mean you should take out the maximum amount. Be sure to only ever take out what you need and can affordably pay back.
Do installment loans require credit checks?
Some lenders do check your credit, so if you’re in a situation where you know you’re going to need a loan, it pays to check your score. Often times your bank or credit card will give you your FICO score for free. If they don’t, you can go to MyFico.
You can get all three credit bureau reports and FICO scores for $60, or you can get one for $20. TransUnion, Experian, and Equifax may vary depending on which ones your creditors report to. One may have an error or negative mark that the others won’t, which is why you should look at your credit report at the same time.
Your credit reports are a complete account of your financial history — meaning on-time payments, missed payments, defaults, and bankruptcies. You definitely need to keep track of your credit reports!
A 2013 Federal Trade Commission study found that over 42 million Americans had errors on their credit reports. Avoid this by getting your free reports once a year through Annual Credit Report. If you see an error, take action and report the error to the credit bureau immediately.
If you know you have bad credit and will need cash before you’ll be able to improve it, there are installment loans specifically for bad credit borrowers.
There are cons to taking out these types of loans (including collateral and high interest rates), so do your research first and make sure you won’t qualify for a normal installment loan.
Do I have a certain purpose for taking out a loan?
It depends on the type of loan you get. Car loans, home mortgages, or student loans obviously all require you to use the money for a set purchase or investment. But if you just get a general unsecured personal loan, most cases, you can use the money for anything you need or want, no questions asked.
People often use unsecured loans for surprise purchases, such as car maintenance or hospital visits. In essence, they’re often used for things that, in a better economy, people would have the money to pay for out-of-pocket without it tipping the scales as much.
Do all installment loans have fixed interest rates?
Unfortunately, not all of them do, but many do. Most lenders know that borrowers prefer loans with fixed interest rates over ones with variable ones because it allows them to truly budget and plan their expenses each month and year.
Before taking out a loan, be sure to ask the lender which types they offer. They may offer both.
Often times, loans with variable interest rates will start out at a lower rate than fixed loans. But they usually rise enough over the course of the loan that they pretty much equal fixed loans by the time they’re paid off.
That’s not always the case, and many times borrowers will end up paying more than if they had gone with the fixed loan from the very beginning. It’s definitely not fun being surprised a few months in and seeing that your monthly payments have risen.
What requirements are needed for a loan application?
While specific qualifications are likely to vary based on the lender, you can count on some similar guidelines like these:
- You have to live in the state where you take out the loan.
- You have to be at least 18 years old.
- You can’t be a debtor in bankruptcy or about to file for bankruptcy.
- You don’t have to be employed, but you do have to have a steady source of income.
- You must have a valid security number or taxpayer identification number.
- Most require a valid checking or savings account.
- Most require a copy of your government issued I.D.
How fast can I get the money once approved?
Not to sound like a broken record, but it depends on the lender. Some online lenders are able to deposit the cash instantly into your checking account, whereas others need one to two business days, if not a little longer.
A word of caution: the faster you get the money, the higher the rates usually are. It’s not written in stone, but is a good rule of thumb.
Can I pay off the loan early?
Some lenders allow borrowers to pay off installment loans early, and some do not (after all, the way they make their money is through interest). The lenders that do allow you to pay off early will usually charge fees to compensate for the loss of money they’d get through interest. Depending on the lender, it may not even be worth it.
On the opposite end, some creditors don’t care if you pay off early and won’t find you at all. If you foresee possibly being able to pay off your installment early, check to see if there will be any fees first.
How do installment loans affect your credit score?
It can improve your credit score, if you make your monthly payments on time. Any type of significant change to your score will require multiple things done on your part.
If you’re specifically getting a loan to help your credit, then double check that the lender actually reports your account activity to the credit reporting agencies (Equifax, Experian, and TransUnion). If they don’t, then find a lender that does.
Installment loans can positively affect your score in two ways. The first way is via your payment history. If you make each monthly payment on time, your score will improve because you’ll have added a positive history to your credit report.
The second way it can improve your credit is via the credit mix category because it diversifies the types of credit you have on your credit report.
Now to the dark side.
Installment loans can also negatively impact your score in two ways. The first way is missing payments. If you don’t make your monthly payments on time, your credit report will incur negative marks and thus lower your score.
The second way it can negatively impact your score is through the balances owed category. Because you’re taking on more debt, the amount of money you owe to third parties will be increased. For this category to help your score as much as possible, you want your debt to be as low as possible.
Don’t worry, the pros outweigh the cons, so nothing is canceling each other out! But, here again, any improvements to your score will be modest as opposed to great.
What is the difference between an installment loan and a payday loan?
Both types of loans are known for getting borrowers cash very fast, making them great for when you have an emergency. However, there are differences between the two — mainly revolving around the length of the loan (or repayment period) and any fees that may occur.
With payday loans, you typically owe the entire amount back (plus any fees) by the time of your next paycheck — that’s why they’re called “payday” loans. Installment loans are different in that they accrue interest on a daily basis and you have a longer time repayment period to pay the entire amount back.