Installment loans give you a lump sum of money through a bank transfer or paper check and then require you to make payments at regular intervals until the amount borrowed is repaid in full, with interest. Some installment loans are secured by collateral, while others are not.
There are various types of installment loans, including personal loans, mortgages, home equity loans and student loans. Each loan type has different APRs, term lengths, loan amounts and fees. The requirements to get approved for a loan will vary by lender, as well.
How Installment Loans Work
You apply for the loan, and the lender evaluates your creditworthiness. You have to give the lender some basic information in the loan application, such as your age, date of birth, address, income, employment history and more.
The lender gives you a lump sum of money, if you are approved. Once you get approved, your lender with either send an electronic transfer to your bank account or a paper check with the full amount of your loan.
You use the money to pay for an expense. With personal loans, you can use the money for almost any expense. If you have a loan for a specific purpose, such as a car loan or a mortgage, your options are more limited.
You make loan payments at regular intervals. After you receive the funds, you'll need to make regular payments to pay down what you owe. This is usually done monthly.
Your lender will report to credit bureaus. If you make all of your payments on time, your lender should report positive information to the credit bureaus on a monthly basis. This information will improve your credit score. Naturally, not paying on time will have the opposite effect.
The account will be closed once you pay off the loan. Once you pay off the loan, the lender will permanently close the loan account. You will not need to make any more payments to them after this happens.
To see which lenders may approve you and what rates you may qualify for, use the free pre-qualification tool on WalletHub. This tool won't hurt your credit score.
The main types of installment loans are personal loans, mortgages, home equity loans, car loans, student loans and credit-builder loans. Each type of installment loan has different requirements, APRs, fees, payoff periods, and amounts of funding. Some are also used for specific purposes.
Personal loans are installment loans that can be used for nearly anything. They typically range from … read full answer$1,000 to $100,000, with payoff periods of 12 to 84+ months, depending on the lender. Personal loan APRs are usually between 4% and 36%.
The credit score requirement for a personal loan is usually between 585 and 700. You can see if you are pre-qualified without hurting your credit score using WalletHub's free pre-qualification tool.
Mortgages, or home loans, allow people to finance a house without having all of the money up front. The issuer of the mortgage continues to partially own the house until the borrower pays the mortgage off fully. If you can't pay the mortgage off, you risk foreclosure.
Mortgages typically last for 10 to 30 years, and the average APR is around 2% to 4%. Mortgages usually require a credit score of around 620 if they're private or 580 if they're government-insured.
Home equity loans allow people to borrow a portion of the difference between the value of their home and the amount left to pay on the mortgage. The loan is secured by the house, however, so there's a risk of foreclosure if you can't pay what you owe.
Home equity loans usually last for 5 to 30 years, have APRs of around 2% to 6%, and tend to require a credit score of at least 680.
Auto loans help you finance the purchase of a new or used car. They usually last anywhere from 24 to 72 months and have APRs of around 2% to 6%. While there isn't a minimum credit score to get an auto loan, the higher your score is, the better your terms are likely to be.
The big downside to auto loans is that since they are usually secured by the car, your vehicle could get repossessed if you can't pay back what you owe. There are also loans for other types of vehicles, such as motorcycles and boats, that function the same way.
Student loans are loans for the purpose of paying for education and related costs like housing and food. Some are federally backed, while others are private. Federal student loans tend to have interest rates around 2% to 5%, while private loans have rates around 1% to 12%.
Student loans usually last around 10 years, but some can last for up to 30 years. You can use WalletHub's student loan calculator to help you calculate how much your monthly and total payments will be.
Credit-builder loans are probably the most unique type of installment loan. They work the opposite way of a normal loan. You make monthly payments to a lender, which puts the money (minus the interest charged) in a savings account. Once you have finished your required payments, you get access to the money in the account. The purpose of a credit-builder loan is to have positive payment information reported to the credit bureaus each month and to establish or improve your credit history.
Ultimately, choosing which type of loan to get is up to you depending on what you qualify for, what your financial standing is and what you need the loan for. You can visit WalletHub's best installment loans page to see the top ranked offers.
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