Simply put, an installment loan is a loan where funds are given as a lump sum upfront and then repaid over a set period of time. The loan is then paid back with interest over a fixed number of regular payments (typically monthly), called installments. The payment amounts, payment frequency, and set interest rate are determined by the terms of the loan agreement.
Secured loans involve collateral, which is an asset that the borrower will forfeit to the lender if the debt cannot be paid. For example, if a borrower takes out a loan on a motorcycle and uses the motorcycle as collateral for the loan, the lender can repossess the motorcycle if the loan doesn’t get paid off. It’s also common for secured loans to have downpayments, or a set amount of money that must be paid upfront in order to take out the loan.
An unsecured installment loan allows the borrower to pay back the loan without using an asset as collateral. These loans typically come with a higher interest rate than secured loans, but usually do not require downpayment’s.
For both secured and unsecured loans, interest rates may be determined by the borrower’s credit score, outstanding debt, and income.
Installment loans are an option that allows borrowers to get a large amount of money to use right away as they see fit. It is important to understand the loan terms in regards to the fixed monthly payment amounts and set interest rate, and any other possible fees or penalties. An installment loan makes budgeting easier and helps to avoid missing payments since it’s possible to calculate the exact payment amounts and due dates over time.
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