What Is an Installment Loan?

| April 9, 2017

installment loanIf you called a payday loan an installment loan would it cost less? Well, that’s the question that some types of installment loans pose. Just like payday loans, some installment loans are marketed directly to people who are short of cash and who need a loan to bridge a short term gap or to meet an unexpected emergency expense.

Often, just as is the case with payday loans, interest rates on installment loans are a lot higher than advertised.

Low or irregular income can sometimes lead to budget problems and people who don’t work guaranteed hours can sometimes not know what they will earn from week to week.

That can make it difficult to keep up with regular bills. It is people who find themselves in this situation who may be tempted to take out an installment loan.

What is an installment loan?

An installment loan is a type of loan where the borrower is granted a loan and agrees to repay that loan in a series of regular, usually monthly, repayments.  These regular payments are the installments that will eventually repay the principal amount of the loan, along with the interest and fees.

Installment loans are different from payday loans because, with payday loan, the borrower usually writes out a future dated check that will repay the loan, the interest and the fees, in full, at the end of the loan period.

When that time comes, the borrower can either tell the lender to cash the check, or they can apply for a new loan. An installment loan, on the other hand, is not repaid in one lump sum; the repayment is spread over a period of time and made in regular installments.

installment loanBoth installment loans and payday loans are generally marketed to people on low incomes, but installment loans in particular are marketed to those people who do not have bank accounts.

Whereas payday lenders do not usually report loans to the big three credit agencies, tribal lenders of installment loans usually do, so an installment loan will have an impact on your credit rating. That can be a good thing if you keep up with the repayments, but it will have a negative impact if you don’t.

What are the risks and pitfalls of installment loans?

As regulators have cracked down on the payday lending industry, installment loans have begun to take the place of payday loans. There are now some states that do not permit payday loans at all and some other states have introduced interest caps on payday loans, but those regulations do not apply to installment loans.

That is the reason that installment loans are fast becoming the new payday loans. The only problem is that installment loans are not always a lot better than payday loans.

A lot of installment loans are advertised with a nominal interest rate, but they also come with additional fees and charges, as well as credit insurance.

What a lot of borrowers don’t realize is that the insurance policies are not compulsory and the addition of these insurance policies can add significantly to cost of the loan.

Installment lenders also frequently offer extensions to existing loans. When an installment loan is renewed, a portion of what has already been repaid is lost, and the lender is paid further commission for the extension of the insurance policies.

That means that the borrower is left with less cash in his pocket, but the loan starts again, with more fees and more charges, which is exactly the same kind of debt spiral that payday loans create.

What are the alternatives to installment loans?

There are alternatives to installment loans that are not payday loans, even if you do have bad credit. One option would be to consider peer-peer lending web sites as an option.installment loans

The best of these sites have fully transparent interest rates and charges, they don’t impose unnecessary insurance policies on lenders, and some are willing to lend to people who have bad credit.

If you have a fairly good credit score, you could be offered lower interest rates from a peer-to-peer lender and you could also consider applying for a loan from a credit union or a bank.

Another option for anyone, with any type of credit score, is to think about asking friends and family for a loan, or approaching a lending circle.

What you should take away from this

It is important to remember that the lenders who offer installment loans do so because they want to make money. If you do need to take out an installment loan, make sure that you do everything that you can to make sure that you keep up with the repayments and you pay back the loan on time.

Remember, too, that you don’t have to take out the insurance policies that a lender offers you. You should also think very carefully before renew an installment loan. It can be very tempting to take the cash when a lender offers it to you, but once you get caught in the trap of spiralling debt, it can be a very hard trap to escape from it.

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