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When you plan for your future, having some kind of a safety net is always advisable as your life could take a turn that could affect you financially. Here we’re discussing how do installment loans work.
An installment loan refers to both commercial and personal loans that are extended to borrowers and that require regular payments. Each of the regular payments for the loan includes a portion of the principal amount, as well as a portion of the interest on the debt.
The amount of each scheduled payment is determined by several factors, such as the amount borrowed, interest on the loan, the terms of the loan, etc. Many installment loans come with fixed payments, which means that the amount that the borrower pays to finance the loan does not change throughout the loan.
Examples of installment loans include mortgage loans and auto loans. Many people will ask how do installment loans work. Apart from mortgage loans, which are variable-rate loans, most installment loans are fixed-rate loans. They are charged an interest rate that is unchanged for the term of the loan from the time of borrowing. Fixed-rate loans require borrowers to pay the same scheduled payments, allowing them to prepare in advance to make future repayments towards the loan.
How to Obtain an Installment Loan?
- When applying for an installment loan from a financial institution, the borrower first visits the credit department of the lender to discuss the terms of the loan, such as the loan amount, down payment, loan duration, interest rates, the purpose of the loan, etc.
- Once the borrower is satisfied with the loan process, he/she is required to make a formal application by filling out the loan application form. The borrower is required to provide personal information (name, physical address, occupation, etc.), amount of loan requested, the purpose of the loan, collateral provided, etc.
- Once the loan application form is submitted to the bank, the lender initiates the loan evaluation process to determine the ability of the borrower to meet the loan obligations. The borrower may be required to provide additional information, such as recent financial statements, proof of ownership of the collateral, evidence of current cash flows, etc.
- The lender may also ask for the borrower’s credit report to get information about the latter’s credit history for the past years. If the lender is satisfied that the borrower is creditworthy, the application will be approved, and the funds will be disbursed.
- If the lender finds that the borrower presents a high risk, it can choose to reject the application or extend credit but at a high-interest rate to compensate for the increased risk.
Installment loans can be either collateralized or non-collateralized. Collateralized loans require borrowers to pledge an asset against the amount of loan borrowed. For auto loans, the motor vehicle being purchased using the loan amount is used as the collateral for the loan until the loan is fully paid.
Non-collateralized installment loans do not require the borrower to provide collateral for the loan. Instead, the lender extends credit based on the borrower’s creditworthiness and ability to repay the loan based on past credit history and current cash flows.
Before you sign up for an installment loan, make sure that you understand the terms of repayment and that you know that you can meet the repayment schedule.
Now you know about installment loans and how do installment loans work. When managed well, installment loans are a great way of getting much-needed cash quickly.
