You may have heard the term installment loan thrown around here and there. While it may sound like a fancy term, chances are you’ve already had one, or you may even have one now. Installment loans are simply a loan which is paid off by the month with a set interest rate.
While installment loans can be hugely helpful to a person’s financial situation, there are definitely pitfalls and things to watch out for. By the end of this article, you will hopefully have a much better idea of what installment loans really are, whether you should consider getting one, and, if you do, which company to go to for it.
So What Are “Installment Loans” Anyway?
Simply put, an installment loan is any loan in which you borrow a set amount of money and agree to pay it back with interest in monthly installments. There will be a set loan term in which you must pay back the loan, and you can certainly expect to pay back a good amount more than you got in the first place.
Installment loans are typically difficult for anyone with a bad credit rating or no history of credit to get. There are some exceptions to this rule, but most loans require a credit rating of around 600. The lender you work for will evaluate your financial position, considering your debt-to-income ratio and employment status and ensuring you can responsibly pay for the loan requested.
Installment loans are a viable way to pay for large expenses such as a car, home or a college degree. Unlike their cousin, pay day loans, installment loans tend to have a high interest rate, a longer loan term, and are spread out with payment “installments”. While payday loans help people get out of a fix when they need some extra money before their checks, installment loans provide people an opportunity to pay for pay for goods, services and investments when they otherwise could not afford to do so.
In some cases, installment loans can be helpful to people without any credit history at all. While many installment loans require a high credit score, there are a number of them which will take on new credit users. If paid back in a timely and appropriate manner, installment loans can be the means by which one begins to build up their credit rating.
There are no particularly typical terms for installment loans. They may range anywhere from a few months to even years. The time duration will largely depend on the income of the borrower and the size of the installment loan itself. In general, the longer the loan term, the higher the interest rate.
Are They Risky?
The business of payday loan has been under heavy scrutiny recently, which prompts the very intelligent question: are installment loans risky? The short answer? Yes and no. Very helpful, right? Here’s an explanation:
Many advocates of installment loans suggest that they are a better and safer option than payday loans because they are made in smaller installments and do not necessarily create the need to borrow over and over again, pushing the consumer further and further into debt. Because lenders of payday loans typically expect the payment to arrive by the next paycheck, using payday loans can push people into a vicious cycle of never having enough before their check comes in, and therefore they go deeper and deeper into interest debt.
Installment loans differ in this aspect. Instead of having to pay the whole sum back in a lump, borrowers are given comfortable payments month to month that aren’t set up to be difficult to pay back. Yes, they will pay interest, but since it’s over time, they aren’t likely to end up in a debt hole.
While this may be true, it is important to watch out for the shady sides of installment loans. The issue with payday loans is that people often come back for more loans, therefore ending up with a substantially large debt burden in which they keep paying off their interest, but never get to the actual debt itself.
While installment loans are often sold as one-time deals to help someone through a quick fix, it’s important to consider how remarkably effective installment loan companies are at getting repeat customers. Seventy-seven percent of World Finance’s loan volume is renewals of existing loans according to CEO Sandy McLean. With aggressive marketing, this company does a scary good job at making a profit off of these debtors.
In addition, many marketers of installment loans push pricey and ineffective “insurance policies” which do no real good for the consumer, but does send a hefty profit to the lenders themselves. This insurance largely just ensures that the lenders will get their payments back regardless of death or disability, and consumers are often not told that these policies are optional.
While installment loans can be helpful when used properly, there is certainly a profit motive in the game, and borrows should watch out for the dirty tricks. Much of the payday industry is moving towards installment loans, which means many of the same marketers who have been under fire have been moving their tactics over to the installment loan industry.
What Should I Look Out For?
So you’ve seen some of the good and bad sides of installment loans. Before you are scared off from the idea entirely, check out these guidelines as to what to look for in case you believe installment loans are right for you. If you tread carefully in this industry, it’s possible to get a great value and a loan that will really do you more good than harm. In order to avoid predatory installment loans, you should watch out for certain red flags which indicate the lenders intentions are not in your best interest, use the general guidelines below:
- Instead of looking out for “installment” loans, look for “personal” loans:
While they’re largely the same thing, the simple change of terminology between personal loans and installment loans could translate into the difference between a predatory lender and a honest lender. Why? The name hasn’t been hacked by scammers yet. It’s simple, but it can work.
- If they’re pushing renewals, just say no:
If you see that your lender is pushing for you to renew a loan, refuse and get away. Far away. In general, a renewal of loans pushes one into the debt trap of paying interest upon interest upon interest without making a dent in the actual debt. Pushing for loan renewal is a clear sign that your lender is not out for your best interest, but rather for his or her own pocket.
- No insurance add ons:
Typically, loan insurance does nothing but protect the lender themselves if you are rendered unable to pay back the loan. Because lenders don’t have to include the cost of these kinds of policies in the overall APR calculations, paying these extra fees could push your rate higher than regulations even allow. It does nothing for you except cost you money, so stay away.
- Guaranteed approval and advance fees? Nope:
If you lender promises you’ll be approved without even looking at your financial information, that’s a tell-tale sign that they aren’t a legitimate installment loan provider. No serious provider will approve you for a loan without looking at your financial information. There are also plenty of good lenders who do not charge advance fees, so there is simply no reason to take out a loan from a lender who does.
- If they’re seeking you, stay away:
There is plenty of email and snail mail marketing out there who are aggressively advertising and trying to coax people into doing business with them. The best lenders do not do this simply because they don’t have to. They have a good name for themselves and they treat their customers right, and that’s why they don’t go out looking for customers with obnoxious campaigns and ads.
Reasons Why and Why Not to Use an Installment Loan
There are a number of important things to consider as you try to decide whether or not the route of installment loans is right for you. First and foremost, consider the following question: how much do you really need the loan? If you’re only looking to take out the loan in order to improve or create a credit history, you’re probably doing it for the wrong reasons.
Think about credit this way. Unless you know the interest rate is absolutely 0 and you know for a fact you’ll have the ability to pay it off, you want to take the business of taking out loans carefully. Do not start creating debt in your life unless you absolutely need to.
A few scenarios in which you may truly need a loan is when you are looking to buy a new car, you need money to make an investment in school, or you need the money while you’re waiting for a larger source of income (be careful with that scenario, make sure you’re 100% sure that money will come in).
Another reason you may want to seriously consider taking on an installment loan is if you need to pay off more expensive debt. Paying off debt with debt? While it seems strange, there are scenarios where the interest rate of your credit card is much higher than the interest rate of the loan you could potentially take out to pay your debt. Take out that loan, pay your debt, then be paying a much lower interest rate on your new debt. It makes perfect sense!
In addition, if you have the cash flow available, taking out a loan when you are getting ready to buy a new car or other expensive item may make sense. Why? If you can get that installment loan at a very cheap interest rate, doing so will free up your cash flow, give you extra money for emergency situations, and leave you in better shape than you would have been if you had paid the money outright for your expensive good or service. You know you’ll be able to pay the debt off, so there is little risk, and you’ll have a larger sum of comfort savings after you make your necessary purchase.
In general, do not take out an installment loan simply because you want to improve your credit score. You’ll be paying quite a lot of interest, and all in all, the credit score will not improve all that much. It’s simply a bad investment, as you aren’t getting as much return as you’re paying in. The only exception to this rule comes in if you are at the edge of a credit score threshold that you need for other loans, and taking out the installment loan could push you off the edge.
The Best Installment Loan Options
Have you decided you’re in the right position and have the right reasons to take out an installment loan? Great! You’re probably now wondering who the heck to go to. While you should certainly still do your homework, we’ve compiled a list of a few reputable companies who practice fairly and may be the right option for you. Your choice will vary according to the amount of money you need to borrow, the credit score you already have, and comparing the various prices and fees of each company, including the overall APR. Here are three of the top competitors.
If you’ve got a good credit score and a need for a hefty amount of money, Prosper may be the company for you. While it’s hard to get, if you qualify for a Prosper loan, you can receive an APR starting at around 6.73%, a very competitive rate. In addition, you’ll be able to borrow quite a sum of money, with loans coming up to $35,000 dollars. Prosper is transparent, straight forward and steers clear of confusing legal jargon that may obscure their intentions.
Prosper isn’t the best idea if you need money on the fly. Receiving a Prosper loan could take a few weeks, and the origination fee may be up to 5% of the loan itself.
The Lending Club model is quite similar to Prosper, with loan amounts up to $35,000 and APRs from 6.78% upwards to over 35%. The fees between Lending Club and Prosper are also very comparable, though their approval rating is not. The Lending Club tends to be stingier on approval and certainly isn’t the best option if your income or credit are on the borderline.
Avant is a great alternative for those who do not have the competitive credit score of Lending Club and Prosper users. If your credit score is at least 600, you probably have a change of being approved. APRs for Avant are somewhat higher, starting at about 9.95%, however you won’t have to pay the origination fee required of the first two contenders.
Avant can get you the money you need at a faster pace as it is a direct lender rather than peer-to-peer lending company. Do pay attention to the fact that Avant is a relatively new start-up, and therefore full evaluation of the company is relatively limited.