When to actually use an installment loan depends on a number of factors, starting with your priorities and necessities. While interest rates are important, be sure to also pay attention to the amount of time you have to repay the loan, and whether or not there are any fees to initiate the loan, or for late payments. It can be easier to budget for a fixed payment than one subject to change each month. In most cases, the interest rate will be fixed rather than variable. Interest rates are generally determined based on your credit score, so if you’ve done a good job repaying credit cards and student loans, you’re more likely to receive a competitive rate. Because installment loans are often for dollar amounts that are larger than you can pay out of your checking or savings accounts, it’s important to know the interest rate being charged. This can be a benefit in terms of flexibility, but it can also lead a cardholder to pay more in interest if they aren’t strategic about their payments.īefore deciding whether an installment loan is a good fit for any particular purchase, read the terms and conditions a lender offers. Another difference: Instead of making the fixed monthly payment until an installment loan is paid off, credit cards allow borrowers to choose how much to repay each month. Credit cards, for example, are a type of revolving credit, which let you continue borrowing until you reach your credit card’s limit, unlike installment loans. Installment loans differ from other popular forms of credit available. They allow the borrower to make monthly payments over a set time frame to cover the purchase, plus interest. One of the virtues of installment loans is their simplicity-you borrow the money and then pay it back over a fixed period of time at a set interest rate. But to benefit from them, it’s important to understand how they work and how to align them with your overall financial plan. And there are other ways that installment loans can benefit people.įor instance, an installment loan can be used to buy the furnishings that transform a new apartment or house into a home to cover expenses in a medical emergency or to foot the bill for that once-in-a-lifetime trip to go trekking in the Himalayas. Though wildly popular, auto loans and student loans aren’t the only varieties of installment loans. Installment loans put those important big-ticket items within reach. The price tags for many of these purchases is well beyond the reach of many people-particularly those building careers and families. At the same time, life is full of costly surprises-whether it be an emergency car repair or a close friend’s destination wedding. Those are the average sticker prices for a new car and one year of tuition and fees at a private American university, respectively. To understand why installment loans are such a popular financial tool, consider these numbers: $36,843 and $35,676. An installment loan, also often called a personal loan, is a versatile tool to pay for large purchases, both expected and unexpected.
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