Pros & Cons of Installment Loans

Installment loan

It is a type of loan that its repayments are under installments or regularly scheduled payments. Each of the payment on an installment debt constitutes repayment of a part of the principal amount that was borrowed as well as the interest payment on the debt. The amount of each payment paid regularly is determined by the variables such as the loan amount, the rate of interest charged to the borrower and the term of the loan. Some of the common examples of installments loans are personal loans, mortgage loans or auto loans. Almost all installment loans have fixed rates meaning that the rate of interest charged over the term of the loan is fixed at the borrowing time. A mortgage loan is an exception since it is variable-rate loans because of the rate of interest changes during the loan term. These types of loans can, therefore, be either collateralized or non-collateralized. The collateral of a mortgage loan is the house in which it is being used to purchase. On the other hand, the collateral for an auto loan is the vehicle that is being purchased with the loan. The rates charged under-collateralized loans are lower than the rates charged under non-collateralized ones.

The process involved in installment loan.

An application is to be filed by the borrower with the lender of the loan by specifying the purpose of the loan. A discussion on various issues is to be done between the two regarding the term of the loan, down payment, schedule of payments and the amounts to be paid. Other fees are therefore to be paid by the borrowers in addition to the rates if interest such as the application fees and loan origination fees as well as other potential extra charges like late payment fees. The borrowers can usually escape other interest charges by making payment of the loan before the end of the term defined in the loan agreement.

Advantages of installment loans

They are flexible and therefore can be provided based on the needs of the borrower.

They are obtained at considerably lower interest rates.

Disadvantages

There can be fixed interest loan that can be paid by the borrower for longer terms at higher interest rate than the rate that is prevailing in the market.

There is a long-term financial obligation the borrower can be locked into hence the borrower can be rendered incapable of meeting the payments that are scheduled. It can, therefore, lead to a risk of default and a possibility that the collateral used to secure the loan can be forfeited.

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