With the many different types of loans out there, and all the talk of predatory lending, many are very wary of loans in general. Loans are a great way to make large purchases and are, in and of themselves, not a problem. It is when someone signs on to a loan that they cannot afford, or at terms they do not fully understand, that problems arise. Installment loans, like all loans, carry a number of advantages and disadvantages, depending on who is doing the loaning, who is accepting the loan, what the terms of the loan are, and the financial health of the person being lent money.
What are installment loans?
In a nutshell, installment loans are loans that are to be repaid, in equal payments, or “installments”, over an agreed-upon period of time. These can be short- or long-term loans, and two of the most commonly known installment loans are mortgages and car loans. While in some ways this is beginning to change, the prevailing logic is that installment loans are more “traditional” loans, and are a safer bet than alternative forms of loans such as payday loans, title loans, and other financial instruments known for their harsh terms and high interest rates.
Installment loans are also considered more legitimate, and a more responsible decision than taking out a line of credit by way of obtaining a credit card, or choosing one of the alternative loans mentioned above. Also referred to as “fixed loans”, these loans are advantageous for large purchases and building a solid credit foundation. Purchases that are incredibly large, or that need to be adequately budgeted for are instances in which an installment loan is often the best choice.
Who gets installment loans?
There are installment loans available for those with a range of different credit scores, including those with poor credit scores. While those with low credit scores can qualify for these types of loans, the terms that these loans are set at are often prohibitive. The more traditional installment loans is most geared towards those with fair to excellent credit scores. When obtained through a legitimate financial institution, this is a great way to make large purchases affordable and attainable. As one’s payments remain stationary throughout the terms of the loan, this makes budgeting for and managing said loan a lot easier.
For new or small businesses, an installment loan is a great way to allow for the creation of, or expansion of one’s endeavor. This is a safe, secure line of credit that doesn’t have wildly changing terms and allows for a transparent way to get a good start.
The disadvantages and more predatory versions of the installment loan
While most installment loans are considered to be safe and sound ways to borrow money, those with lower credit scores are more likely to fall prey to a loan with harsh terms. This usually means a much higher interest rate and harsher penalties for late or non-payments. So-called “payday loan” companies are now offering their own version of an installment loan to those with poor credit. These loans tend to have an interest rate of at least 30%. And it can go much higher than that. If this weren’t enough, the repayment schedule is often quite short, making it highly difficult for individuals to repay these loans without taking out new ones. It is easy to see how this can turn into a vicious cycle of debt.
Conclusion
Installment loans are not right for everyone, and not all lending institutions have the best intentions when lending. Doing your homework before taking on any loan is always recommended. For those with fair to excellent credit, installment loans are a safe, secure, and fiscally sound way to obtain a line of credit for a large purchase such as a house, business, or vehicle. While there are decent installment loans available for those with poor credit, it is advised to avoid any sort of payday loan scheme, as these tend to be recipes for financial disaster, and can, in the end, stand to worsen, not improve your credit score.
