An installment loan describes a lump sum of money that you borrow and then repay with interest in fixed amounts, or installments. Here is more about the features of an installment loan and how to compare your options to find the best fit for your needs.
An installment loan gives you all of your money upfront, with a date that you must repay the entire loan. You pay back a portion of the principal you borrowed, plus interest, with each loan payment you make.
In contrast, revolving credit allows you to borrow up to a limit, repay it and borrow again indefinitely. Examples are credit cards, personal lines of credit and home equity lines of credit, also called HELOCs.
“An installment loan is your best option when you know how much money you will need,” says Mike Vierzba, education coordinator at Ent Credit Union in Colorado. Another major benefit: “Installment loans are cheaper debt, meaning they will generally have a lower interest rate than their revolving counterparts.”
A secured loan is backed by the borrower’s collateral, an asset such as a home or a car that the lender can sell to recoup losses if you default. Common secured installment loans include mortgages, home equity loans and auto loans.
An unsecured installment loan does not require collateral, which means you don’t risk losing valuable assets such as a home or a car if you can’t repay. Common unsecured installment loans include personal loans and student loans.
Secured installment loans often have lower interest rates than unsecured options because the collateral reduces risk for lenders.
Borrowers don’t have to worry about putting a home or a car on the line, but getting the loan could be tricky. “The bar for approval will be higher on unsecured loans,” Vierzba says.
Find the Best Student Loans for You
The process to get an installment loan varies by the type of loan you want. Here’s an overview of how to apply for some of the most common installment loans:
- How to apply for a mortgage loan. You’ll typically apply directly with a lender or through a mortgage broker. The mortgage application and underwriting process require a lot of documentation to ensure that you’re eligible. Conventional mortgages usually call for a minimum credit score of 620 and a maximum debt-to-income ratio of 43%, but some government-backed loan programs have more lenient requirements.
- How to apply for an auto loan. You can finance a vehicle through a lender or a dealership. You can get approved for an auto loan even with bad credit, but your DTI should generally be lower than 50%. Documentation requirements can vary depending on your creditworthiness.
- How to apply for a student loan. College students and their parents can apply for federal and private student loans. The first step is to fill out the Free Application for Federal Student Aid, or FAFSA. Federal student loans do not require a minimum credit score. Credit checks are used for federal Direct PLUS loans for graduate and professional students and parents, and applicants must not have certain negative items in their credit history. If you want private student loans, you will need a minimum credit score in the mid-to-upper 600s. DTI requirements can vary by lender.
- How to apply for a personal loan. Personal loans are available across the credit spectrum, but if you have bad credit, you may face high interest rates and fees. While most personal installment loans are unsecured, you can get a savings-secured personal loan, which uses cash in your savings account as collateral. Credit score and DTI requirements can vary by lender, and you will often apply directly with the lender.
- How to apply for a credit-builder loan. This type of installment loan works a bit differently: You get the loan amount after you’ve finished paying off the debt instead of upfront. Credit-builder loans are designed for people who need to build or rebuild credit and are great for establishing a positive payment history. Not all lenders offer credit-builder loans; check with your local community bank or credit union first. You’ll apply directly with a lender to get a credit-builder loan.
- How to apply for a small-business loan. Commercial lenders typically require a good business or personal credit history, two or more years in business, and a minimum amount of revenue. But shop around. You will want to apply with lenders that are the best fit for your business.
Personal loan interest rates rose this week, trending higher for three-year and five-year loan terms. Here are the average personal loan rates offered to well-qualified applicants with a credit score of 720 or greater, as of Jan. 3:
- Three-year personal loan term: 19.05% (up from 17.6% a week ago).
- Five-year personal loan term: 20.9% (up from 19.94% a week ago).
Personal loan rates vary widely based on creditworthiness. Borrowers with very good or excellent credit scores will see much lower interest rates than those with fair or poor credit, as seen in the chart below:
Find the Best Personal Loans for You
Yes, you can find many different installment loans for bad credit. Your options will depend on the type of loan you’re hoping to get.
With mortgages, for instance, most lenders require a credit score of 620 or higher. And while you can go as low as 500 with a Federal Housing Administration loan, your best bet is to build your credit history before you apply.
Other types of installment loans are available with bad credit, but the catch is that your loan will be expensive. You can get auto loans, personal loans, student loans and even small-business loans with less-than-perfect credit.
What can you expect to pay? Personal loan companies typically charge up to 36% interest, but some bad-credit personal loans rise into the triple digits. You could pay an interest rate of more than 20% for a bad credit auto loan, compared with 10% if you had very good credit, according to U.S. News data on auto loan rates.
If you need money now, though, and don’t have time to improve your credit, shop around and compare lenders. In some cases, you can use an online marketplace that allows you to compare multiple loan offers side by side based on your credit profile. These prequalification tools typically require just a soft credit check, which won’t hurt your credit score.
Some lenders may look beyond your credit score to offer decent terms. Financial technology companies are issuing personal loans to people with bad credit at competitive rates, says Tomy Boboy, founder of the Everyday Finance YouTube channel, because they can “pull your banking data to get a better picture of your financial situation.”
As you compare options, look at interest rates, fees, repayment terms and other features that could affect your budget.
- You can finance a big purchase.
- The loan will have a fixed payment amount throughout the loan term.
- You’ll know your payoff date.
- Borrowers get one lump sum rather than flexible amounts.
- Lenders may require collateral, putting your home or car at risk if you default.
- You’ll pay interest.
- Get prequalified. Make sure you can prequalify with a soft pull that won’t harm your credit score. Prequalifying will show you the loans you have good odds of getting approved for and the terms you might receive. This will help you narrow down your options.
- Compare APRs across multiple lenders to check that your rate is competitive. Only apply with lenders that charge reasonable APRs. Do not accept a loan with an APR of more than 36%. Also, look for lenders that offer repayment terms that fit your needs.
- Consider loan size and repayment term. A longer term will decrease your payments, but you will end up owing more interest.
Here are some steps you can take to ensure you get the lowest interest rate possible:
- Improve your credit. Most lenders use risk-based pricing, which means that your interest rate is directly correlated with the likelihood that you’ll default on the debt. The higher your credit score, the less likely you are to miss payments. Check your credit score and credit report to get an idea of where you stand, and then take steps to address credit issues and increase your score.
- Shop around. With most installment loans, the criteria for determining interest rates will vary by lender. The exception is with federal student loans, which offer standardized rates for all who qualify. When possible, take advantage of prequalification tools to view and compare offers without a hard credit check. But make sure you’re comparing apples to apples. Compare fixed rates with other fixed rates and variable rates with other variable rates. Lenders may offer both types of loans, but the two are different in how they work and how much they might cost.
- Offer a larger down payment. If you’re taking out a loan to buy a car or a home, putting more money down can lower the loan’s interest rate because it shows that you’re invested. Just be sure to leave some cash reserves in your savings account to cover emergencies.
- Apply with a co-signer. You may be able to apply with a co-signer to improve your chances of getting the loan or to qualify for better terms than you could on your own. If you want to go this route, apply with someone who has a stellar credit history.
- Opt for a shorter repayment period. Lenders typically charge higher interest rates on loans with long repayment terms to account for the risk that rates will rise over time and they’ll miss out on higher profits. While a shorter repayment period means a higher monthly payment, it also means lower overall costs thanks to a lower interest rate.
Find the Personal Loan That’s Right for You
People with poor credit may feel that their financing options are limited and turn to payday loans to access quick cash. Unlike installment loans, payday loans require a single payment, typically within 14 days of the loan disbursement.
Payday loans also charge exorbitant interest rates, with annual percentage rates that can soar as high as 664%, depending on where you live.
Because payday loans charge predatory interest rates and don’t offer the chance to repay in installments, most borrowers can’t pay them back on time. The result is compounding interest charges and fees that make repaying the debt even more challenging. “The more you look at payday loans,” says Boboy, “it almost seems like you’re guaranteed to fail, doesn’t it?”
If you’re thinking about applying for a payday loan, take extra time to research other options, such as payday alternative loans from your local credit union, or personal loans. You may also consider reaching out to local organizations that can offer emergency financial assistance.
- Credit card: Charge purchases on a credit card and pay them off over time, or pay off your balance by the due date to avoid interest. If you end up carrying a big balance, know that you could also be stuck with big interest charges.
- Personal line of credit: This is an unsecured revolving line of credit with a variable rate, and an account functions similar to a credit card. You borrow as needed, repay and borrow again as long as the line is open.
- HELOC: A HELOC is a revolving source of funds, similar to a credit card, that you can access as needed. The loan is secured by your home, which helps you get a competitive rate but also means you risk losing the property if you default.
- Payday alternative loans: This is a short-term loan offered by federal credit unions as an alternative to payday loans if you need a way to make ends meet.
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