Installment loans are different from other consumer credit like payday loans and credit cards and can help you get back on track
Payday loans have been getting a lot of attention lately with interest rates upwards of 500% a year. The topic brings up another type of loan called installment loans that might be a better alternative to payday lenders and credit card borrowing.
One alternative that isn’t as well known is called an installment loan. These types of loans usually come with much lower rates and longer to pay, two factors that could help you get back on your feet and avoid more debt.
Most people are surprised to hear that installment loans really aren’t a new type of loan but just a new name for an old type of borrowing. Installment loans are just loans you pay off through regular payments like a mortgage or car loan.
The difference is that installment loans may be easier to get. Some installment loans don’t even require a credit check and most offer fast online applications with instant approval.
That’s not to say that installment loans aren’t without their risks. Understanding your way around these risks and how to get the best rates available will help you get the money you need and even improve your credit score.
How are Installment Loans Different from Other Loans?
There are a few key differences between installment loans and other types of credit. Installment loans generally are paid off over six or more payments on a monthly or bi-monthly basis versus the one-time payment required on a payday loan.
Payments are usually fixed for an installment loan, making budgeting much easier compared to carrying a lot of credit card debt where payments can vary each month. Interest rates are normally fixed on an installment loan as well whereas credit card rates can rise each year.
The multiple payments to pay off an installment loan can mean an easier payoff compared to payday loans. Most payday borrowers get trapped in a cycle of refinancing their loan every two weeks because they can’t afford to pay it off and pay their bills.
- Fixed payments on installment each month
- Longer pay-off period from six months to five years
- Lower rates depending on your credit score
These differences make installment loans a better choice versus payday loans or cash advances. You’ll have lower payments because you have longer to pay off the loan and lower rates. You can also borrow more so you don’t have to keep coming back to the lender for more money each month.
How to Use Installment Loans to Get Back on Track
Interest rates are generally lower for installment loans compared to payday and credit card borrowing. Peer lender Lending Club reports that borrowers lower their interest rate by an average of 35% compared to credit cards. It’s the reason why debt consolidation loans make up the majority of peer loans.
The debt consolidation process is fairly straight forward, adding up your outstanding loans and taking out one loan to pay them off. What most payday borrowers don’t realize is that installment loans can be a good way to get out of the paycheck-to-paycheck trap. Most payday loans are for smaller amounts like $500 or less, just enough to pay a few bills but not enough to get out ahead of your debt.
That doesn’t mean an installment loan is for everyone or it’s guaranteed a good choice for you. It’s free to check your rate on an installment loan from a direct lender and it won’t affect your credit. If the rate offered is higher than what you’re paying on credit cards then it may be better to just keep making your card payments.
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An installment loan will almost always be cheaper versus a payday loan. That’s because most states have maximum interest rates that can be charged for loans. The fees on payday loans and cash advances aren’t technically considered “interest” so the lenders get away with sky-high rates.
Payday loans normally charge a $15 fee for every $100 borrowed over two weeks. Borrow $300 and get trapped into refinancing can add up to over $1,000 a year in interest on a loan that won’t even cover your rent. The monthly interest payment on a $10,000 installment loan at 16% interest will cost an average $76 per month over five years and the total monthly payment of $243 is less than that $300 payday loan.
One of the most overlooked benefits of installment loans is the increase in your credit score. Installment loans are usually available for three- or five-year terms, meaning you’ll have up to 60 months of on-time payments to boost your FICO score. Payment history is more than a third of your score so paying off an installment loan looks good on a credit report.
Installment and peer loans go on your credit report as non-revolving debt, compared to credit cards that go on your report as revolving debt. Types of credit is also a factor in your credit score, up to 10% of your FICO, so having this non-revolving debt rather than revolving credit is a positive improvement.
How to Get an Online Installment Loan from a Direct Lender
Filling out the application and getting an installment loan online is extremely easy and can take less than five minutes. The application includes your contact information, bank account, monthly income and employer info.
Installment lenders will make a soft check on your credit to estimate your rate. If you agree to the rate and the payments look manageable, the lender will deposit the money directly into your bank account. Most loans can be funded within a day or two.
Installment loans are usually available from $1,000 to $35,000 and on terms up to five years. You’ll get lower rates on smaller loans paid off in shorter periods so only borrow as much as you need and choose the three-year payment option if you can afford the payments.
Installment loans are not some mysterious new type of credit, just a new word for a traditional type of loan. The loans bring a lot of benefits compared to payday loans and credit card debt which can help you put your finances back on track. Understand the key differences between installment loans and other debt and how to compare your rates for your best loan deal.