Unfortunately, many of them didn’t have enough savings to cover the bills. In fact, only four in 10 could pay off a surprise expense of $1,000.
If you find yourself in such a situation, you can turn to installment loan lenders for help. These are less expensive than payday loans and have longer terms too. Plus, many lenders can get you the money you need in as little as one day.
But what is an installment loan exactly? What can you use it for aside from emergencies? And most importantly, how do you get one and pay it back?
This post will answer all these questions and more, so be sure to keep reading!
What is an Installment Loan? Your 90 Word Explanation
Installment loans are loans that you pay back in monthly increments or “installments”. You get the entire loan amount in a single lump sum, then pay it back monthly with interest and other fees. Banks, credit unions, private lenders, and online lenders offer these loans.
Mortgages, car loans, and other personal loans are all types of installment loans. But if you specifically take out an “installment loan“, then that’s a loan that has a shorter term. Often, you repay back such loans in six or twelve months, although some lenders offer longer terms.
How They Work
So, how do installment loans work?
Installment loans have an unchanging interest rate, so monthly payments are also fixed. Unlike payday loans though, you can borrow larger amounts with an installment loan. This still depends on your income and credit score, but you can borrow from $2,000 up to $10,000 (or even more).
Also, since they have terms longer than payday loans, their interest rates are lower too.
What You Can Use an Installment Loan For
Say you want to set up an e-commerce store that carries all must-have household items. To capture the attention of your target market, you need top quality photos and videos of your goods. After all, visual content in your pages can get you up to 94% more views than if you only used plain text.
For that, you need to invest in a solid or at least semi-pro DSLR camera which can cost $500 to $3,000. Even if you go for a mid-range DSLR cam, it’ll still set you back around $2,000. An installment loan can get you that $2,000 quick if you don’t have that kind of dough lying around.
In fact, you can use an installment loan for any legal purpose, like starting any other online business. You can even use it for renovating your home or paying for emergency medical expenses.
What It Takes to Get an Installment Loan
The requirements vary from lender to lender, although they have similar basic qualifications. First, you need to be at least 18 years old and a U.S. citizen currently living in the country. You also have to show proof of regular income, through tax returns and pay stubs.
Banks have stricter requirements though, as they’ve rejected up to 76% of applications. In most cases, banks only approve good to high credit score borrowers.
Online lending platforms, like Bonsai Finance, have a more relaxed application process. You still need to meet the basic qualifications, but you can still get approved even with a low credit score. To increase your chances of approval, provide a backup payment source, like a debit or credit card.
Also, online lenders tend to process applications faster than traditional lending institutions. You can complete the entire application procedure online and get an update within a day. If you qualify for an online installment loan, you may even see the money within the same or next business day.
Note that online installment loans often have higher interest rates though. So, be sure to take your time when comparing loan programs and their interest rates. But their relaxed lending rules make them an ideal choice for bad credit borrowers.
Paying Back Your Loan
What about repayment — how are installment loans calculated? An installment loan payment consists of the loan balance, interest rate, and term.
The “loan balance” is the amount of money you borrow. The “interest rate” is the money (or interest) you pay the lender for letting you borrow their money. The term is the length of time the lender gives you to pay back what you owe.
Interest rates on consumer loans are often expressed in annual percentage rates (APRs). Aside from the interest rate, an APR already includes other fees and service charges. For loans with terms of less than a year, some lenders use simple interest.
Let’s use simple interest to see how a $2,500 loan with a six-month term and 5% interest will cost you in total.
To calculate only the total interest you’ll pay back with a simple interest rate, use this formula:
(Loan amount) * (interest rate) * (number of months in your term)
Here’s how it’ll look like:
$2,500 * 0.05 (decimal conversion of the 5% interest rate) * 6 (months) = Total interest to be repaid.
That’s a total of $750 for interest only, or $125 per month on top of the monthly loan amount repayment.
For the monthly loan amount repayment, you only need to divide the loan amount with your term. So, that’s $2,500 divided by 6 (months), or $416.66. Now, add that to your interest of $125 to get your final monthly repayment.
That brings your total monthly payment to $541.67. For the entire duration of your loan (the term of six months), you’ll pay the lender a total of $3,250.
Note that this is only an example, and that interest rates vary widely from lender to lender. So, be sure to ask the lender how they’ll calculate your loan repayment and show you a computation. Especially if they use an APR instead of simple interest.
Apply for An Online Installment Loan for Access to Quick Funds
Now that you know what an installment loan is, time to start searching for the best lenders! If you need the money ASAP, then consider an online loan, since they’re easier and quicker to apply for.
But make sure you don’t forget the dos and don’ts of taking on debts, as you don’t want to bite off more than you can chew.
In need of a loan specifically for your business? Then check out this list of the top online loans you’d want to consider!