There are all types of loans out there — mortgages, auto loans, credit cards, payday loans, student loans — but they all primarily fall into two buckets. They’re either installment loans or a revolving line of credit (more on this below.) With installment loans, you borrow a specific dollar amount from a lender and you agree to pay the loan back, plus interest, in a series of monthly payments.
Qualifying for an installment loan can be a great way to pay for a car, home or even pay a portion of a college degree, depending on your credit score and overall financial situation. Home equity loans, which can come in handy for home repairs and maintenance, also are installment loans, as are personal loans. Payday loans (also often referred to as “spot loans” or “no credit check loans”), however, are not — those short-term, high-cost loans are generally expected to be paid back in a lump sum when the borrower gets their next paycheck (hence the name.) Here, we’ll explain installment loans in more detail and provide some tips on how you qualify for one.
What’s an Installment Loan?
Like we mentioned earlier, with an installment loan, you agree to pay a fixed monthly payment over the length of the loan term. So, for example, if you borrow $10,000 for a five-year period at a 6% interest rate, you would pay $193.33 a month for 60 months (or installments). Contrast this with a revolving line of credit, like a credit card, where borrowers have a set limit that they can pay back and re-use over time.
To determine the interest rate or whether you qualify at all for an installment loan, a potential lender will look at your credit score, your annual income and your debt-to-income ratio. Lenders look at this ratio to see how much you can responsibly afford to borrow in a potential installment loan.
A lender may ask you a number of additional questions including the name of your current employer and the number of years you have worked at your employer, all in determining how well you are likely to manage the monthly payments of an installment loan.
How to Get an Installment Loan
Because your credit score is such a crucial part of the loan application process, it is important to keep close tabs on your credit score in the months before you apply for an installment loan. Using Credit.com’s free credit report snapshot, you can receive two free credit scores, plus customized credit advice from experts — so you can know what steps you need to take to get your credit score in tip-top shape before applying for a loan.
You also will want to make sure your credit reports are accurate and error-free before applying for an installment loan. You can request a free credit report once per year from each of the three major credit reporting agencies — Equifax, Experian and TransUnion — and correct any errors.
Also, given lenders are likely to look at your debt-to-income ratio, you might want to pay down any high credit card balances you’re carrying before applying for new financing. That move can help you secure a better deal — and keep you from overextending yourself.
Where Can I Get an Installment Loan?
A good place to begin shopping for an installment loan is with your local bank or credit union, where you already have an established relationship with a potential lender. And if you are approved for an installment loan from your local bank or credit union where you already have accounts such as checking or savings accounts, you may qualify for discounts on the interest rate.
There are also many online lenders who offer personal installment loans. However, it’s important to vet any lender you are considering carefully before applying for a loan as not all companies are created equal. You should also comparison shop from lender to lender to be sure you’re getting the best deal. Finally, read the fine print of each potential installment loan carefully so you’re aware of all the costs associated with it, what happens when you default and whether there are any penalties for paying it off early, among other things.
Additional reporting was contributed by Jeanine Skowronski