Installment loans make it possible to borrow a lump sum of money, from hundred𝓀s to thousands of dollars, and repay it through a series of fixed payments (installments) over months or years. You typically have a set interest rate and repayment term, so you know exactly how 🦩much the loan will cost and when you can expect to pay it off.
These loans, which can be used to pay for a car, a home, and virtually anything else, are either secured or unsecured. If the loan is secured, it requires collateral (like a car) to back it. If it’s unsecured, you don’t need to use collateral, though it’s generally more difficult to qualify for unsecured loans.
- Types of installment loans
- Where to get this kind of loan
- Qualifying for an installment loan
- How to apply for a loan
- Installment loans vs. payday loans
- How does borrowing affect my credit?
What are the different types of installment loans?
There are multiple kinds of installment loans. Here areℱ a few examples:
- Auto loan: This is a secured installment loan in which your car acts as collateral. Auto loans generally have repayment terms ranging from two to seven years. You can get auto loans from car dealerships, online lenders, banks, and credit unions.
- Personal loan: This is perhaps the most flexible installment loan — you can use it to cover a wide variety of expenses, from home repairs to medical bills. Many personal loans are unsecured, but they tend to have stricter eligibility requirements since the lender can’t seize any collateral if you fail to repay your loan.
If you don’t qualify for an unsecured personal loan, you may want to consider applying for a secured one (or attaching a cosigner to an unsecured loan application). Just remember that secured loans are riskier for borrowers. - Mortgage: If you plan to buy a home, you’ll likely need a mortgage to make it possible. Your home will act as collateral, making this a secured loan. The most common mortgage loan terms are 15 or 30 years, though you may be able to save money on interest with a 10- or 20-year repayment term.
- Student loan: College is expensive, and many families turn to student loans to pay for higher education. These installment loans can be federal or private and can have fixed or variable interest rates. When you take out a student loan, you’re typically granted a grace period — you don’t have to repay it until six months after you graduate college.
Where can I get an installment loan?
You can get an installment loan from online lenders, banks, and credit unions. With a credit union personal loan, for example, you may be able to qualif💯y for lower rates or discounts given your membership.
The benefitsღ of online lenders include convenient application processes and generally faster funding times. This can be great if an emergency hits and you need money withi🍌n a few days.
How do I qualify for an installment loan?
When it comes time to apply 💙for an installment loan, you💛’ll generally need the following to qualify:
- Good credit score: The higher your credit score is, the easier it is to qualify for an installment loan and more favorable rates. A good credit score is typically 670 or higher. But even if you have bad credit, you may be able to get an installment loan.
Some lenders specialize in lending to borrowers with lower credit scores, focusing on factors like education and employment history instead. You could also make up for a subpar credit score by applying with a cosigner or co-borrower. - Proof of income: Many lenders have minimum income requirements, since they want to ensure that you can afford your loan payments. You may need to submit documentation like W-2s or pay stubs as proof of income.
- Low debt-to-income ratio: Lenders also look at your debt-to-income (DTI) ratio when considering whether to approve your application. The DTI ratio is your monthly debt payments divided by your gross monthly income. For example, if you have $3,000 in monthly payments and your gross monthly income is $5,500, your DTI ratio is 55% (3,000/5,500 = 0.55). This ratio accounts for how much of your income is currently going toward other debt obligations. Some lenders look for a DTI ratio that’s 36% or lower, but this requirement varies.
How to apply for an installment loan
If you decide an iꦆnstallment loan is the right fit for you, here are the steps to applꦇy for one:
- Determine your loan amount. You can use a personal loan payment calculator to see how much your monthly payments will be for different loan amounts, interest rates, and repayment terms. Creating or updating your budget can help confirm month-to-month affordability. If you’re applying for a home or auto loan, you must also decide how much of a down payment you can afford to make.
- Check your credit reports. Knowing your credit score can help you determine which lenders are more likely to approve your loan application. You can request a free copy of your credit report weekly from the three major credit bureaus — Equifax, Experian, and TransUnion — through the end of 2023 via . Review your credit reports closely to see if there are any errors that are bringing down your credit score. Dispute any that you find with the appropriate credit bureau so you can raise your score before applying for a loan.
- Comparison shop. Spend time shopping around with a few different lenders to get an idea of potential rates and fees you may pay. It’s a good idea to prequalify with lenders to get a more realistic view of the terms the lender will likely offer you. Prequalifying doesn’t harm your credit, and it only takes a few minutes.
- Gather the necessary documents and apply. During the application process, you’ll need to provide information about your finances. You may need to submit documentation like your W-2s as proof of income. Gathering those documents ahead of time can help speed up the application process. Limit the number of lenders you apply with to minimize the impact of hard credit checks on your credit score.
- Undergo a credit check. Lenders will perform a hard inquiry, or hard credit check, when you apply for a loan. A higher credit score makes it easier to qualify for the best personal loans, but you can still qualify for loans even if you have a lower credit score. You’ll pay a higher interest rate when you have poor credit, which adds to the cost of your loan.
- Accept the loan. If the lender approves you, you’ll need to sign some loan documents. Carefully review these to ensure you understand all of the terms of your loan before signing.
Are there differences between installment loans and payday loans?
Payday loans are no💟t the same as installment loans. Here’s how these two financial products differ (and why you should avoid payday loans if possible):
| Installment loans | Payday loans | |
|---|---|---|
| Interest rates | Interest rates vary by lender, but some lenders offer rates between 5.40% and 35.99%. | Payday loan rates can be as high as 400%, which makes them extremely risky. |
| Loan amount | Loan amounts vary by lender, but they typically range from several hundred dollars to hundreds of thousands of dollars (specifically for mortgages). | Because payday loans are designed to help bridge financial gaps between paydays, they’re usually $500 or less. |
| Payment due date | You generally make payments in monthly installments. | You must repay a payday loan in full by your next payday. |
| Repayment term | Repayment terms vary, but they can be between two years (for auto and personal loans) and 30 years (for mortgages). | Payday loans are very short-term loans (you generally have to repay them when you receive your next paycheck), and those repayment terms can be challenging to meet. |
How does an installment loan affect my credit?
Installment loans can have both positive and negative effects on your credit. If you make your payments on time, you’l🍎l give your credit score a boost. On the other hand, if you mis꧑s payments, you can harm your credit score and risk having your debt sent to collections.
An installment loan can diversify your credit mix — the different accounts you have open — which makes up 10% of your FICO credit score. While this can have a positive effect on your credit, the hard credit check from your loan application can lower your credit score by a few points for one year.&🌳nbsp;