Ultimate Guide to Installment Loans in 2017

Installment loans. They might sound scary, but they are incredibly common. 70% of homeowners have one. Over 80% of new car buyers have one. And 44.2 Million Americans have one from financing their higher education.

So what are these installment loans? Should you take one out? And where can you find the best rates?

We tackle these questions and more in the ultimate guide to installment loans in 2017.

Installment vs. Revolving credit

While there are thousands of types of credit, the credit bureaus think of loans in two categories. The first type is revolving credit. Revolving lines of credit is a type of credit that renews as soon as you pay down debt. The most common example of revolving credit is a credit card. If you have a $1000 credit limit, and you spend $100 on your credit card you have $900 of credit remaining. When you pay your $100 bill, your credit limit returns to $1000. A less common example is a Home Equity Line of Credit.

All other types of credit are installment loans. The amount of “available credit” decreases when you pay off installment loans. Once you make your final payment, the account closes.

With installment loans, you receive money from the bank up front. Then you pay off the loan over time in a series of scheduled payments. Banks call the payments installments.

Car loans, student loans, mortgages and personal loans are all installment loans.

Banks love to see consumers with installment loans. Paying the same amount, on time, every month proves you are a good credit risk.

Some installment loans have assets that guarantee the loan. Banks call these loans secured installment loans. Examples include mortgages (where the house secures the loan) or auto loans (where the vehicle secures the loan). If you default on a secured loan, the bank will take possession of the asset. To the bank, these are lower risk loans, so they bring lower interest rates or better repayment terms. For borrowers, these loans are riskier. If you fail to pay, you’ll give up a valuable asset.

Unsecured loans don’t have any backing asset. If you default, the bank has to sue you to get their money. These are riskier for the bank, so they come with higher interest rates.

Who will qualify for an installment loan?

Whether you have good or bad credit, you may qualify for an installment loan. People with good credit will have an easy time finding low interest rates. Online lenders such as Sunlight and SoFi compete to keep rates on personal loans as low as possible. This is great, as long as you maintain excellent credit.

On the other hand, people with poor credit will struggle to find compelling rates. Interest rates on unsecured installment loans can be as high as the rates on a credit card. Some even rival the interest you will pay for a payday loan.

So should you take out an installment loan? The answer depends on your situation.

Why do you want an installment loan?

An installment loan can be a powerful tool to help you manage your credit, payoff debt or manage your finances. But it could also destroy you. These are some reasons you might want to take out a new installment loan.

To save money

If you have heaps of credit card debt, you might be stuck in a high interest trap. A debt consolidation loan might help you save money. In a best case scenario, it will lower your interest rates. That means more money will go to paying off the debt and less to interest.

In general, debt consolidation is a good idea. But tread carefully if you have poor credit. Some debt consolidation loans have interest rates as high as 36%. The rate may exceed your credit card interest rate.

A debt consolidation loan might come in handy if you’re paying lots of late fees. Late fees cost $25-$35 each, and credit card companies won’t waive them after your first late payment. As long as you can afford the monthly payment, a debt consolidation loan will help you save money. At least, it will help you save money compared to paying late fees. If you don’t make the payment on time, you’ll still pay those pesky fees.

Before you consider an installment loan, consider a balance transfer credit card. Balance transfer credit cards have a 0% interest rate for several months. Most cards require you to pay a 3% balance transfer fee, but the interest savings overwhelm the fee in many cases. People with great credit might find that a balance transfer credit card is a better option than a personal loan.

To lower payments

Can adding a payment really lower your monthly cash flow? It depends on the situation. If you refinance a car loan or a mortgage, you will usually reset the “amortization schedule.” The amortization schedule shows how long it will take to pay off the item. Resetting the amortization schedule lowers your monthly payment.

Sometimes, the lower payment results from a lower interest rate. In that case, you’re lowering your payment and possibly lowering the amount of interest you pay overall. However, if your interest rate stays the same, you’re just extending lower payments for a longer time. This means that you pay more interest overall.

In general, enhancing your financial health means limiting the total interest you pay. However, you may have a specific situation where lower payments are better. An installment loan that lowers your payments may help you manage your credit better. The number one thing you can do to improve your credit is to pay your current accounts on time. If an installment loan helps you do that, it’s a good tool.

To buy something new

Car loans, personal loans, HELOCs, and mortgages are all loans designed to help you buy something new when you don’t have the cash now. Depending on the way you manage your finances these installment loans could be a blessing or a curse.

Poor credit and financing new things don’t mix well. A credit score below 650 means that any installment loan will be at a “Subprime” lending rate. What does that mean? You’ll pay more. Subprime borrowers pay more fees and higher rates than those with fair credit scores.

In general, it’s better to defer borrowing until you have at least fair to good credit. For example, we recommend waiting to buy a car until your credit reaches at least 650. You don’t want to get trapped in a high interest loan with a payment you can’t afford.

On the other hand, low interest installment loans can help you achieve important financial goals. Some people will choose to pay cash for a car or for a college education, but other people choose to finance these purchases. Either method works. The key is to evaluate your true needs, and to determine the best way to purchase what you need.

To improve credit

Subprime lenders often advertise installment loans as a way to help people improve their credit. This advertising is part true and part scam. The truth is that an installment loan may help you build credit, but it won’t happen overnight. Plus, you’ll have to pay interest on the loan. It’s an expensive way to build credit since you can usually build credit with a single credit card.

Nonetheless, an installment loan improves your credit mix. Paying it on time will give you a history of on time payments. These are excellent behaviors to build, but they aren’t a silver bullet.

In general, you should only take out an installment loan if you want to save money, lower payments or buy something new.

If you desperately need to rebuild your credit, an installment loan should be your last option. First, take care of your current accounts. Next, where possible, work to remove negative information from your credit report. You may want to enlist a credit repair company to help you. Last, take out new loans to improve your credit.

A credit builder loan, like the loans from Self Lender, allow you to build credit at a low cost. Credit Builder loans, also known as Savings Secured Installment Loans, work the opposite of most installment loans. Instead of receiving the money up front, you pay a set payment each month. At the end of 12 or 18 months, you receive the funds less any interest you pay.

Where should I get an installment loan?

If you’re in the market for an installment loan, you need to be a savvy consumer. You may need to spend as much time shopping for a loan as you spend shopping for a product.

This means lining up financing for a car before you purchase it. It means getting pre-approval from several banks before you purchase a house.

Likewise you need to shop around for the best unsecured personal loan. We’ve compared some of the best installment loan offers of 2017 to bring you our recommendations.

Excellent Credit

CompanyInterest Rates (As of 2/13/17)Origination Fees (As of 2/13/17)Payoff TermsBorrowing Limits
Sofi5.70% – 14.24%0%3,5 or 7 Years$5,000 – $100,000
Lightstream2.19% – 14.79%0%2 – 6 Years$5,000 – $100,000
Upstart4.99% – 29.99%1% – 6%3, 5 Years$1,000 – $50,000

 

Good Credit

CompanyInterest Rates (As of 2/13/17)Origination Fees (As of 2/13/17)Payoff TermsBorrowing Limits
Lending Club5.32% – 30.99%1% – 6%3, 5 YearsUp to $40,000
Best Egg5.99% – 29.99%0.99% – 5.99%3, 5 Years$2,000 – $40,000
Loan Depot6.17% – 29.52%1% – 5%3, 5 YearsUp to $35,000
Upstart4.99% – 29.99%1% – 6%3, 5 Years$1,000 – $50,000

 

Average Credit

CompanyInterest Rates (As of 2/13/17)Origination Fees (As of 2/13/17)Payoff TermsBorrowing Limits
Lending Club5.32% – 30.99%1% – 6%3, 5 YearsUp to $40,000
Avant9.95% – 36.00%0.95% – 3.75%2 – 5 Years$1,000 – $35,000
PeerForm7.12% – 29.99%1% – 5%3 Years$1,000 – $25,000

 

Fair or Poor Credit

CompanyInterest Rates (As of 2/13/17)Origination Fees (As of 2/13/17)Payoff TermsBorrowing Limits
Avant9.95% – 36.00%0.95% – 3.75%2 – 5 Years%1,000 – $35,000
PeerForm7.12% – 29.99%1% – 5%3 Years$1,000 – $25,000

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