How Do Installment Loans Work?

Anelle Valdes
Anelle Valdes
What Is Better: a Payday Loan or an Installment Loan? | Difference Between Wise Loan and Payday Loan | Wise Loan

If you’re having trouble keeping up with your credit card bills or other debt, you may benefit from an installment loan. But how do installment loans work and what do you need to know before you get one? The good news is that installment loans are just a fancy way of saying that the repayment terms of your loan are fixed, meaning you’ll have to pay the same amount each month until the loan is paid off. That’s great for budgeting and planning, and it means you’ll never be surprised when the bill comes each month.

Installment loans are different from other loans in that they combine the principal loan amount with the interest that you would pay over the lifetime of the loan. Unlike credit cards that charge you fees on top of what you owe — where the amount you owe each month can change drastically — an installment loan is fixed, and you’ll be on the hook for a specific amount each and every month.

Common types of installment loans include home mortgages, auto loans, and student loans, though there are many other personal and business loans that can also take the form of an installment loan. Installment loans are popular when the entire loan amount is known up front, such as with a defined home or car purchase, and open-ended loans such as credit card debt and the like are more flexible but less predictable over time.

It’s also true that an installment loan doesn’t have to be a long-term thing. Many installment loans have terms as short as a month or less, and these types of short-term loans are intended to help you close the gap when an unexpected bill pops up or you need some quick cash before payday. Instead of debt that you’ll carry for months or years, these types of loans are paid off almost as quickly as they’re received, though the shorter term can still include significant interest.

Pros and Cons of Installment Loans

If you’re considering an installment loan, it’s important to know when and where an installment loan makes sense, or whether you’d be better off with a more traditional loan.

One of the main benefits of an installment loan is that it can help you build credit. Since you’ll know the monthly payment in advance, they’re typically easier than other types of loans that change over time, so you can budget and make accurate payments to help boost your credit score. Another benefit of an installment loan is that you’ll enjoy lower interest rates than a comparable loan, which means you’ll pay less over the lifetime of the loan. Installment loans are also fixed, so your rate won’t go up no matter what happens, making it easier to protect your budget over time.

But an installment loan isn’t always a good idea. Installment loans are typically harder to get and have stricter qualification requirements, which means you might have to go through a proof of income or credit check when you apply. You also have less flexibility when it comes to an installment loan. If you come into some extra money and want to help pay down the loan, you’ll still pay the exact same amount as if you continued your monthly payments. Some installment loans may also have significant penalties or fees if you miss or are late with a payment, while other installment loans may require collateral such as a car title or a portion of your mortgage, which could jeopardize your assets if you can’t make your payments.

Qualifying for an Installment Loan

An installment loan is harder to qualify for than a regular loan. Because it’s a long-term contract, lenders want to make sure that you can fulfill your end of the bargain and repay your loan. If you’re unsure whether not you’ll be accepted, it can be a good idea to review your credit score and check your credit history to see what might prevent you from getting your loan. A credit score over 700 should help you get your loan, while scores less than 650 could be problematic. 

Your debt-to-income ratio, or DTI, is also an important component of whether you’ll qualify for an installment loan. A lower DTI is better, and it basically tells lenders that you make enough to pay off all your debts. Generally, a DTI of less than 35 percent is ideal, but you can still get a loan with a DTI up to about 50 percent. To determine your DTI, just divide your debt and monthly bills by your gross monthly income.

Wise Loan to the Rescue

If you’ve been wondering how online installment loans work, Wise Loan can help. Our loan application takes just five minutes and you can qualify without good credit or a good credit history. Most loans are approved within minutes and offer instant funding, same-day funding, or next day funding, so you’ll know immediately if the money will be there for you. With no hidden fees and a quick turnaround, Wise Loan is one of the best ways to build credit and get the money you need to help pay your bills. Apply and get approved today with Wise Loan. 

The recommendations contained in this article are designed for informational purposes only.  Essential Lending DBA Wise Loan does not guarantee the accuracy of the information provided in this article; is not responsible for any errors, omissions, or misrepresentations; and is not responsible for the consequences of any decisions or actions taken as a result of the information provided above.

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