When you need to borrow money, lenders will offer you something called an installment loan. In this post, we’ll explain what is an installment loan and some good ways to use one.
An installment loan is when a lender gives you money, and you agree to pay them back with interest in equal installments over a pre-determined number of months.
Contrary to other forms of lending like credit cards, where interest rates can fluctuate, and payments can extend for years, installment loans are very predictable and therefore more manageable for most consumers.
There are lots of good examples of installment loans. Here are a few that get used every day.
The classic type of installment loan is a mortgage. Mortgages allow people to become homeowners by providing the hundreds of thousands of dollars needed and allowing them to pay it back over the next 30 years. Buyers also will often refinance their mortgages when interest rates become more favorable.
Another extremely common style of an installment loan is an auto loan. Since most new and used vehicles cost several tens of thousands of dollars, many people won’t be able to buy one outright. Instead, they’ll have to finance their purchase with an auto loan that can last anywhere from 4 to 7 years.
Adventure seekers who like camping, water sports, or riding motorcycles will use installment loans to make their purchases. Depending on the desired vehicle, the amount borrowed might be tens of thousands and can last as long as 20 years.
If you’re a homeowner, chances are you’ll want to update the kitchen, bathroom, or some other project at some point. Since these renovations can cost tens of thousands, personal loans for home improvement like a home equity loan are a good way to cover them. Given the magnitude of the improvement, it may even increase the value of your home, making it more attractive when you eventually go to resell it.
Sending your child or even yourself to university can be a costly endeavor. While federal student loans are available, many people will also rely on installment loans for students called private student loans to get the additional funding needed to support earning their degree.
If you’ve accumulated a revolving balance on your credit cards or have a lot of other high-interest debt, installment loans can be a helpful way to cover them. Typically, a person will apply for what’s called a consolidation loan which can be thought of as one big loan that will be used to pay off all of the smaller outstanding ones. The advantage is that the borrower will shed variable high-interest debt for one that’s more manageable and agreeable.
If you’re suddenly hit with an unexpected medical bill or have a major event upcoming a wedding, don’t max out your credit card. A personal loan is another form of an installment loan that will provide you with the funding you need under more reasonable terms.
Installment loans allow you to borrow money and then pay it back in fixed monthly payments. Even though mortgages and auto loans are classic examples, people can use them for several reasons, such as home renovations, college, debt consolidation, and many others.