As the name suggests, an installment loan is simply a financial product that you can repay in installments over a period. Generally, people who have large expenses to make borrow an installment loan as it allows them to make the payments in fixed monthly installments. The credit provider will set an interest rate on the loan that you decide to borrow. The rate of interest depends on a variety of factors. Some of the most common factors that will be assessed by the lenders are your income, expenses, debt-to-income ratio, credit score and profile, loan amount, term, and your current employment status. Depending on these factors you can borrow a loan up to £35,000.
Here’s what you should know about installment loans.
How does an installment loan work?
When you borrow an installment loan, you agree to repay it in fixed monthly repayments until you pay off the entire amount that you’ve borrowed along with the interest. The repayment period of the loan may last for years and sometimes for months. Choose your repayment period carefully keeping in account your affordability.
You will have to fill an online application form with necessary details such as your address, employment status, income, expenses, how are you planning to spend the funds if you receive (purpose of the loan), and the loan term.
Once you apply, lenders will assess your loan application and they will inform you of their decision after a careful assessment. Your creditworthiness will be reviewed to determine how much the credit provider may lend you and at what terms.
What are some examples of installment loans?
Installment loans are generally categorized into two types – secured loans and unsecured loans. Secured loans are those that you can borrow by securing it against your property. That means you will be using your home as collateral to borrow a secured loan.
While with an unsecured loan, you can borrow money without providing any collateral to the credit provider. If you make payments in installments over a specified period, then your loan is an installment loan, irrespective of the type.
Some classic examples of installment loans are:
- Personal loans
These are installment loans that you can repay over time in fixed or variable monthly payments. Whether you will have to pay in fixed monthly installments or variable installments depends on the type of interest rate that you have agreed to. You can use a personal loan for a variety of reasons including wedding and home improvement. As this is an unsecured form of borrowing, the rate of interest is comparatively higher than a secured loan.
When you take out a mortgage, you agree to pay the lender money along with interest every month till your mortgage is paid off. This is also an installment loan as you are repaying the debt in parts. If you fail to repay your monthly mortgage payments, the lender may take possession of your property. They may sell it off to recover the money they owe to you.
What are the advantages of an installment loan?
There are a lot of advantages of choosing an installment loan and the major one is – flexible repayment periods. Usually, you will have to pay these installments on the same day each month. If you have taken a small personal loan, and you can manage to make payments weekly, you should ask your lender if they have such a provision.
Installment loans are flexible and can easily be tailored to your particular needs in terms of the size of the loan and the length of time. You can choose a repayment period after careful consideration of your creditworthiness. This financial product allows you to access funding at a significantly lower interest rate than is normally the case for revolving credit lending, such as credit cards.
How installment loans help your credit score?
When you borrow a loan, the credit provider sends information to the credit bureaus. All your activities surrounding the loan that you have taken are recorded and sent to the bureaus for an update. The credit bureaus update your credit profile according to the information they receive from the lender.
Hence, ensure that you repay your installment loan on time and in full as that will boost your credit score. Also, you can benefit from the “credit mix”. If your credit report has a variety of financial products listed on it, then it improves your score.
A typical mix of personal loans on installment and usage of the credit card can certainly power boost your credit ratings. So, be careful when you borrow a loan as if you fail to repay the debt on time, it will harm your score.
Learn more about the factors that have a negative impact on your credit score.