Installment loans are debt that is given from a financing company that allow you to make regular payments based on agreed-upon terms until the entire principle and any interest is paid in full. Many consumers at some point may apply for an installment loan if they cannot afford to pay the entire amount of the item in full. Debtors must take into consideration how much they can truly afford and have the resources and income to repay the loan.
Types of Installment Debt
Installment debt may be offered on different products. For example, a car and a home are considered installment debt. When purchasing a home or car, a down payment is sometimes required, which helps pay down the principal. The installment debt can have payment arrangements of weekly, biweekly, monthly, quarterly or annually. Most installment loans become legal by signing a contract which binds you to the loan.
Interest Rate
Your interest rate determines how much, in addition to the principle, you will pay when the loan is paid back in full. For example, a consumer who purchases a car at 15 percent interest will end up paying hundreds or thousands of dollars more in the interest rate compared to a person who has a 5 percent interest rate on the same model. When requesting an installment loan for your intended product, shop around until you find a company willing to offer you the lowest interest rate for the item.
Credit
Your credit score not only determines your interest rate for the installment loan, but having an installment loan on your credit can actually help you maintain or increase your credit score. Credit scores can be as low as 300 to over 800, and the score is determined by the three credit bureaus: Equifax, Experian and Transunion. Credit scores are measured on how well you can timely pay different types of loans. This can include installment loans, revolving loans such as credit cards, and other types of credit. The more you pay your loans on time, the higher your credit score will be, which can then allow you to obtain a lower interest rate in the future.
Amortization Schedule
Your amortization schedule shows you your payments each month for the entire life of the loan and how much of the amount goes to principle and interest. For example if you have a $10,000 loan and your monthly payments are $200, in the beginning of your loan, $180 may go toward your interest while the remaining $20 goes toward your principal. As you approach the end of your loan, more money will go toward the principle and less toward the interest.
Pay-Off Strategies
In order to save money over the life of your loan, use payment calculators from sites like bankrate.com to find out how much money you will save and how quickly you can pay off a debt by paying more than the minimum amount due each month.
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