Like any financial decision, there are general pros and cons to consider, and then, there are personal factors that can help you determine whether or not to pursue a purchase or loan. If you choose to take out an installment loan, the terms and costs of that loan will impact your income, credit, and future. Before you take out an installment loan to buy a home, consolidate debt, or finance a new fridge, consider the pros and cons.
The Pros of Installment Loans
Big Purchase Power
Installment loans allow borrowers to pay for some of life’s most important — and sometimes most costly — needs, like post-secondary education, housing, and transportation. Within a short amount of time, you can get approved for a large amount of money that you’ll pay back over a set period of time. Your payments will be the same each month which can be helpful when budgeting and prioritizing your expenses.
Refinance Option
At some point during the term of an installment loan, it is possible to refinance the terms and the interest rate. You can refinance loans like mortgages, vehicle loans, and even student loans to help save money. By reducing the interest rate, your monthly payment amount will go down. Even when the repayment period increases as a result of refinancing, your smaller monthly payments can help you save or redirect money to other expenses.
Deferred Payments
There are different meanings for this type of payment arrangement, but a common installment loan, sometimes known as a buy-now, pay-later option, allows borrowers to make a purchase and delay paying for that purchase. This type of point-of-sale financing is often available at retailers that offer items such as washers, refrigerators, or lawnmowers — all things that can suddenly break down. Pay-later loans can help cashless consumers with good credit get what they need.
The Cons of Installment Loans
Interest
Depending on the economy, interest rates can cost you a lot. When interest rates are high, the cost of borrowing money is high, too. Say you wish to purchase a home for $300K when the economy is stable. Your monthly payments or installments on that loan will be significantly lower than if you were to take out the same loan amount when the economy is nearing or in a recession. This, of course, assumes a variable like your credit score is the same during either variance of the market.
Not Open-Ended
Unlike a revolving loan like a credit card or line of credit wherein a borrower can use and pay down money repeatedly, installment loans must be paid within a set period of time. Then, after you pay off the loan, the account is closed. You cannot use the approved amount that has been repaid to make other purchases.
Require Collateral
Installment loans sometimes require secured collateral. For example, mortgage loans are used to buy a house and are secured by that house. Likewise, auto loans are used to buy a vehicle, and the vehicle serves as collateral for the loan. So, if you default on your loan installments, the lender could take possession of your home or repossess your car.
Prepayment Penalties
Sometimes when you’re locked into an installment loan term and you decide you can pay the loan off early, it’s important to check the terms of your loan to determine if there are prepayment penalties. Paying off the loan early without checking for a penalty fee could be costly.
If approached wisely and repaid on time without missed payments, installment loans afford consumers purchasing power to buy a home or a car, get a college degree, consolidate debt, and ultimately do more than their bank account balance could afford at the moment.
Now that you know some of the pros and cons of installment loans, take a moment to get your financial information in order before submitting any loan applications. Next steps, get a copy of your current credit report and consult a financial expert who can provide professional advice to support your decision-making process. Once you understand your credit and what your budget will allow for, you can hit up these lending leaders to find the right loan for you.
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Sources
https://www.annualcreditreport.com