Often a longer-term loan, an instalment loan requires the borrower to make a series of repayments, as opposed to a single repayment. These repayments can be referred to as "installments."
Actual loan amount, APR and term may vary based on actual application details.
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At its core, an instalment loan is just like any other loan — a borrowed sum of money that is repaid with interest added on top of the initial loan value. Interest rates, loan amounts and loan terms can all vary from one lender to the next, and installment loans can be either secured or unsecured. So the question becomes, how is an instalment loan different from a short-term or other type of loan?
"Instalment loans can come with a series of dates on which a repayment will be made."
There is not really a universal distinction between an installment loan or a short term loan as a short term loan may be repaid in instalments. However, many short-term loans have a single repayment date While this may seem like a simple distinction, the truth is that having a series of payments makes it a different kind of loan.
An example of this lies in the typical length of a short-term loan versus an instalment loan. Because installment loans come with a series of repayments, they are typically repaid over a longer period of time than a short term loan. Oftentimes, these longer loan durations are coupled with a higher loan amount and, in certain cases, a lower interest rate (note: having a lower interest rate does not mean the total cost of credit is necessarily lower). This has to do with a number of variables, including the lender, the loan type, the loan amount, and perhaps most significantly, the borrower's credit history.
Short answer? Yes.
Long answer? Yes! As a loan that is borrowed from a lender and repaid with multiple scheduled repayments, a mortgage is most certainly a type of instalment loan. And as with any other loan type, different mortgages can come with a variety of rates and terms.
"A mortgage loan interest rate could be either fixed or variable…"
A lot of people think that an instalment loan is just like a credit card. While the comparison might seem logical, it isn't accurate. It's true that a credit card can be repaid in a series of payments, but this alone does not make it an installment loan.
"A line of credit provides the borrower with a set amount of credit they can borrow against."
A credit card is actually a line of credit. This means that the lender has provided a source of funding that can be borrowed from at the discretion of the borrower. Instead of a loan with a set amount of funds given to the borrower all at once, a line of credit provides the borrower with a set amount of credit they can borrow against. This line of credit will typically include a monthly repayment date, wherein the borrower can repay either a partial or the full amount they have borrowed that month, depending on the lender. Additionally, many credit cards won't charge interest if a customer makes their full repayment before or on the statement due date.
For anyone who needs to take on a loan, this should always be the first step. Consider the reason you need funding — do you have an emergency where the need for funding is urgent, or are the funds for a planned expense, such as home improvement? Do you need a larger amount of cash, or will a less substantial amount cover your needs? Finally, how much time do you need to repay? Will you be able to cover your repayment costs by the next payday, or would a longer period of time make more sense?
"Determine the kind of loan that works best for your financial circumstances."
By answering all these questions, you can determine the kind of loan that works best for your financial circumstances. For larger loans amounts, or a longer repayment period, an installment loan may be the right fit but do you due diligence.
Once you have determined the kind of loan you need, it's time to compare your lending options. While it makes sense to start with banks and credit unions because they will likely have the most favourable rates, you shouldn't necessarily limit your search — consider all your option such as family and friends or alternative lenders. Finding a lender you can trust should be your top priority, and there are ample resources available for this search.
"Consider all your options, and even if you need funding urgently, take your time with this step."
For starters, use the information present on various lenders' websites. Compare different APRs, alongside each lender's rates and terms. If you want more information, you can even contact lenders directly. Good customer service can indicate a more trustworthy lender, and speaking directly to a representative is a good way to have your questions answered. Finally, consider using a lender comparison site. This is a common tool available to potential borrowers, where the various elements of different lenders' offerings are presented directly next to one another.
Regardless of your need for a loan, checking your credit rating and having at least a basic understanding of your credit history is a must for anyone. Your credit history contains vital information for anyone considering you as a potential borrower. All the three main credit reference agencies — CallCredit, Equifax and Experian — are required to offer a £2 credit check; if you're contemplating a loan, it may be a good idea to request a credit check from all three agencies.
"Your credit history contains vital information for anyone considering you as a potential borrower."
The other half of this coin is having an idea of what a potential lender is looking for. Again, review the lender's rates and terms on their website, gathering as much information as you can regarding their credit history requirements and determining their policy regarding credit checks. If you still have questions, contact the lender directly and talk to a representative.
Once you have done your due diligence to determine the right lender, and before you apply for an instalment loan, you need to decide on a repayment schedule and repayment amount that will work for you. The best way to approach this is by creating a budget, building an assessment of your finances to know what you're capable of repaying. The last thing you want to do is take on a loan you aren't able to repay, which is why knowing exactly how much extra you'll have each month to commit to repayments is so important.
"The best way to approach this is by creating a budget…"
First of all, the consequences of not repaying any loan depend on your loan agreement, lender and whether or not the loan is secured or unsecured. For a secured loan, the consequences will typically be the loss of assets that have been pledged as collateral. An unsecured loan, on the other hand, can have less immediate consequences to your belongings.
Generally, not repaying an unsecured loan will result in the lender's collection department following up with the borrower. Within this window the borrower can still repay the loan, although late fees may be added to the owed repayment amount depending on the lender.
If the lender's collections department doesn't receive the funds, they may choose to sell the debt to a collection agency, who will work diligently to see that the loan is repaid.
A final consideration to bear in mind is that, should a loan go past the final repayment date without being repaid, there's a very real possibility that the lender will report the defaulted loan to a credit agency, hurting both your credit rating and credit history. If you ever find yourself in this situation, be sure to contact your lender immediately. You may find that they will offer alternative repayment dates, or work with you to find another solution.
First of all, while various installment loans may share similarities, it's important to remember that with different lenders come different loan rates and terms. That said, the key difference between a short term loan and an instalment loan is in the way that they are repaid.
Most of the time, short term loans come with one set repayment date — typically the borrower's next payday. This is the date on which the borrower will be expected to repay the full amount of the loan. Instalment loans, on the other hand, come with a set series of repayments, or "instalments." This allows the borrower to repay a smaller amount with each repayment, while the accumulated repayment still serves the lender's needs.
Interest rates are a common element of a loan, regardless of the loan type or the lender. While the rates themselves can vary dramatically, it's unlikely that you'll find a lender offering loans without them. This is because lending money must be worth a lender's time. If a lender didn't earn any money through lending, that lender would instead try to find an alternative way to invest that money and make a profit.
In the case of instalment loans, you'll find that interest rates are often lower than those found with a short-term loan. While on its face this may seem like a reason to choose an instalment loan over a short-term loan, it's important to understand exactly why an instalment loan may have a lower interest rate.
With their longer loan durations, instalment loans are suited to larger loan amounts, as it gives the borrower more time to pay off the larger amount. When a lender is considering the risk of lending, they will weigh larger loan amounts more heavily — the larger the loan, the greater the risk. And because lenders use a potential borrower's credit history to determine their likelihood of repayment, it stands to reason that for larger loan amounts, lenders will be more likely to lend to borrowers with better credit histories.
Additionally, borrowers with better credit histories tend to receive better interest rates; if there is evidence that you repay credit promptly and completely, you represent a lower risk to a lender.
So, because of the typically larger loan amounts found in installment loans, the borrowers that receive access to these funds often come with better credit histories, and in turn receive a lower interest rate. Remember, when reviewing and comparing interest rates that you pay attention to the duration of the loan because that may affect your total cost of credit.
This is a good question, and depends on a key variable: whether or not the interest rate is fixed. In the case of instalment loans, where a series of repayments are agreed upon, the lender can choose to employ either a fixed or a variable interest rate.
In the case of a variable interest rate, the lender is entitled to alter the interest rate over the course of the loan, depending on the original loan agreement with the borrower. Variable interest rates are sometimes employed in the case of a mortgage loan, where the loan duration is so long that the interest rate may need to be adjusted based on the market.
For fixed interest rates, the lender and borrower agree to one interest rate, that will remain constant for each repayment amount. Standard installment loans will typically come with a fixed interest rate, allowing the borrower to know precisely what the interest on each repayment will be.
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.