What is an Installment Loan?
The term “an installment loan refers to both personal and commercial loans which are offered to borrowers and require regular repayments. Each regular payment for the loan comprises part of the principal amount in addition to an amount of interest charged on the debt.
Each scheduled installment is set by a variety of variables, including the amount of money borrowed, the interest charged on the loan as well as the conditions of the loan, and so on. A lot of installment loans come with fixed installments, which means that the amount the borrower has to pay to finance the loan is not subject to alteration over the course of the loan.
Some examples of installment loans include mortgage loans and auto loans. In addition to the mortgage loan, which is variable rate loans, the majority of installment loans are fixed-rate loans. They have an interest rate that remains unchanging for the entire term of the loan beginning at the moment of taking the loan. Fixed-rate loans require that borrowers make the same payments as they are scheduled and allow them to plan in advance for the payments in the future towards the loan.
How to Obtain an Installment Loan?
In order to apply to get the installment loan from a financial institution, the borrower goes to the credit department of the lender to discuss the conditions that the lender will offer, including what is the loan amount, downpayment, time period of the loan, and interest rates, the purpose of the loan, etc.
When the borrower is content with the process of loaning, he/she will be required to complete an application in writing by filling out the application form for a loan. The borrower has to supply personal information (name physical address job title, address, etc. ) the amount of loan sought, the purpose of the borrowing, the collateral provided, and so on.
After the loan application is delivered to the bank the lender begins the loan evaluation process in order to evaluate the capability of the lender to fulfill the loan’s requirements. The borrower might be required to submit additional documents like recent financial statements as well as evidence that the collateral is owned by them, proof of cash flows in current times as well as other documents.
The lender can also request an applicant’s credit report to obtain information regarding their credit experience over the last years. In the event that the loan provider is confident that the borrower’s credit score is acceptable, the application will be accepted and the money are disbursed.
If the lender determines that the borrower is an excessive risk, the lender could decide to decline the application or offer credit but with a high-interest rate in order to cover the higher risk.
Types of Installment Loans
1. Auto loans
A car loan can be described as an installment loan that is borrowed for the purchase of a motor vehicle. The loans typically come with a loan period of 12-months to sixty years or even more, depending on the lender as well as the loan amount.
The lender offers the borrower a sum equivalent to the price of the vehicle and the borrower accepts to pay monthly installments to the loan until it’s completely paid. The car purchased with the money becomes security for the loan. If the borrower fails to make the loan the collateral is taken away and then sold to collect any loan amount.
The mortgage form of loan is used to buy a home. It has a maturity period between 15 and 30-years (or more) where the borrower has to pay monthly installments for a period of time until the loan amount is fully repaid.
The majority of mortgages have fixed interest rates, which means that the monthly interest and principal payments are fixed. Another option for fixed interest rate mortgages is an adjustable-rate mortgage. With adjustable-rate mortgage loans, the rate of interest will be fixed during the duration of the initial period that the loan is in effect, following which it changes in accordance with the market interest rate.
3. Personal credit
Personal loans are a type of loan that is used to pay for a personal loan a type of installment loan that borrowers use to pay for immediate expenses, like wedding costs, tuition at college, or the cost of medical treatment. The term of the personal loan can be from 12 months to 60 months. The majority of personal loans have fixed interest and borrowers must make regular monthly installments for the duration of the loan.
Collateralized vs. Non-Collateralized Installment Loans
Installment loans are either collateralized or not. For collateralized loans, borrowers must make a pledge of an asset to the amount of the loan. In the case of an auto loan, the vehicle which is being bought with funds from the loan amount is used as the collateral to secure the loan until the loan is paid in full.
Similar to mortgage loans the collateral is the home that will be purchased with borrowed funds. The borrower doesn’t fully have ownership of the home until the loan is completely paid. Prior to an installment loan being disbursed, the collateral needs to be assessed at the amount of its fair market value in order to establish whether its value is adequate to the amount of the loan.
The non-collateralized installment loans do not require the borrower to pledge investment collateral for the loan. Instead, the lender lends credit according to the borrower’s creditworthiness as well as his capacity to repay the loan, based on their past credit history as well as the current cash flow.
In the course of reviewing loans, the lender can seek to see the borrower’s credit report from credit bureaus to determine the applicant’s credibility. Because of the risk involved in lending these loans and the high risk of collateralized loans, lenders offer a higher rate of interest for loans that are not collateralized than loans secured by collateral.