Every year, more than one-third of Americans (34 percent) take out personal installment loans.
Are you in a tight spot financially? Could you use a little extra money in your bank account? If so, then an installment loan might be a good option for you to consider.
Never heard of this type of loan before? If you’re scratching your head wondering, “what is an installment loan,” don’t worry.
Read on to learn more about installment loans and what you need to know before you apply for one.
What is an Installment Loan?
An installment loan is a type of unsecured loan that you pay back in — you guessed it – installments.
With an installment loan, you borrow a lump sum of money from a lender and pay it back with regular monthly payments, plus interest.
For example, if you took out an installment loan of $5,000 with a six percent interest rate for a three-year period, you would make monthly payments of $152.11 until the loan was completely paid off.
You can use an installment loan for just about any reason. According to this great article, some of the common reasons why people take out installment loans include the following:
- Keeping up with bills and making payments on time
- Consolidating debt to lower your interest rate and simplify the repayment process
- Getting through tight spots and making sure you have enough cash
- Making an important purchase, such as a computer for school or to repair your car
Many people apply for personal installment loans from their local bank or credit union. You can also work with an online lender.
Applying for Installment Loans
Clearly, there are lots of reasons why someone might need an installment loan. How do you go about getting one, though?
If you’re interested in applying for an installment loan, the following tips will help you ensure you get approved and get the money you need:
Check Your Credit Report
The first thing to do when you want to apply for an installment loan is to take a good look at your credit report.
Your credit score will influence the amount of money you can borrow, your interest rate, and whether or not you actually get approved for your loan. Your credit report will tell you more about the factors influencing your credit score.
You can also analyze your credit report to check for errors that could be lowering your credit score. If you notice any errors, be sure to get them fixed before you apply for a loan.
Pay Down Your Debt
This is easier said than done, obviously. After all, if you had the ability to pay down your debts, would you really need to apply for an installment loan?
If at all possible, though, try to pay down your debts, especially smaller debts like your credit card balance, before you apply for an installment loan.
If you have too much debt, or if you have a history of not making payments on time, your lender is going to be hesitant to give you more money.
Even if they do approve your application, they may penalize you with a high interest rate as a precautionary measure.
Only Ask for What You Need
To increase your chances of getting approved for a loan, only ask for the minimum amount that you need. If you ask for too much, you might get turned down altogether or stuck with a very high interest rate.
Think about the amount you need and think about what you can afford to pay back. Even if you do qualify for a higher amount, that doesn’t necessarily mean you should accept it.
Before you apply for a loan, do some research to learn about different lenders. Find out the average interest rates that come with their loans and do some comparison to figure out which one will be the best fit for you.
Look at both brick-and-mortar lenders and online lenders to find the best loan amounts, terms, and interest rates possible.
Consider a Co-Signer
Finally, consider finding someone to co-sign your loan.
A co-signer is someone with a high credit score who agrees to take over your loan payments if you default. If you have poor credit or no credit at all, a co-signer will increase your chances of approval significantly.
If you do decide to work with a co-signer, make sure you can pay back what you borrow. Remember, if you default, they have to pick up the slack and their credit score will also suffer.
Paying Off Installment Loans
If you follow these guidelines, you’ll have a much easier time getting approved for an installment loan. Getting approved is only half the battle, though. Remember, you also have to make sure you can pay back that loan on time.
Neglecting to pay back your installment loan on time could negatively affect your credit score and make it harder for you to get approved for other loans or other credit options in the future.
Here are some tips that will help you ensure you pay your loan back in a timely manner:
- Set up automatic payments so you never have to worry about missing one
- Make double payments to pay off the debt more quickly
- Whenever you get extra money (bonuses, tax refunds, etc.), put that money toward your loan payment
You might also need to pick up a side hustle to bring in some extra income and make sure you always have the money needed to pay off your loan.
Need More Financial Advice?
Now that you know more about installment loans and have a clear answer to the question, “what is an installment loan?” are you interested in applying for one for yourself?
When you do apply for a loan, be sure to keep these tips in mind to increase your chances of getting approved and making sure you can pay it back on time.
If you’re still on the fence about installment loans, or if you just want to learn more about money management in general, we’ve got lots of articles for you to check out.
Start with this one on four common financial mistakes you ought to avoid.