You need to find the installment loan that works best for you, and that begins with knowing exactly what questions to ask.
If you’re looking to take out a personal loan, then it very well might be an installment loan. Even if you’re looking for a bad credit loan you may be considering installment loans alongside the normal roster of payday loans, title loans, and cash advances.
Regardless of your credit score, finding the right installment loan for you means knowing the right questions to ask. Well, you’re in luck! Here are five questions you should be asking yourself before taking out an installment loan.
1. What’s the interest rate?
This is pretty basic stuff, but it never hurts to repeat: When shopping for an installment loan, you want to find the best interest rate you can. Don’t just go with the first loan you see. Do your research, and find the most affordable loan you can.
A loan’s interest rate measures how much that loan is going to cost. Whereas short-term no credit check loans like cash advances and title loans charge interest as a flat fee (say, $15 per $100 borrowed), installment loans charge interest as an ongoing rate. The longer your loan is outstanding, the more interest accrues.
The best measure to use is the loan’s annual percentage rate (APR), which calculates how much the loan will cost over the course of a full year, including both the interest and any additional fees.
One thing to keep in mind, however, is that you will likely be paying less money in interest than the stated rate would imply. This is because interest gets charged as a percentage of your outstanding balance, which grows smaller every time you make a payment.
One of the great things about installment loans (as opposed to short-term cash advance loans), is that paying off the loan early will save you money. Like we mentioned above, the longer the loan is outstanding, the more interest accrues. Happily, the reverse is also true: the sooner you pay the loan off, the less interest you’ll pay.
There is an exception to this last rule, which we’ll cover in question number four.
2. How much are the individual payments?
While interest rate and APR will determine how much your installment loan costs, they don’t actually determine whether or not you can afford the loan. That’s going to depend on the size of your payments.
Before you agree to take out a given installment loan, you need to look at the proposed payments and measure them against your monthly budget. Do the math and ask yourself: Am I going to be able to afford these payments? If not, then this is not the loan for you.
Installment loans have an amortizing repayment structure. This means that every individual payment goes towards both the principal amount owed and the interest. The ratio of principal to interest for each payment changes over the life of the loan according to the loan’s amortization schedule.
There are several factors that determine the size of your loan payments. Beyond the amount that you’re borrowing and the interest rate, there’s the length of the loan’s repayment period and the frequency of the payments themselves.
Obviously, the more money you borrow, the larger your payments. The same goes for interest rate: the higher your rate, the larger your payments. And the more infrequent your payments, the larger those individual payments are going to be.
But the total repayment period can be a little trickier. The longer a loan is outstanding, the more payments are made, and the smaller each individual payment is going to be. Borrowing a certain amount of money with a two-year installment loan, for instance, will mean smaller payments than borrowing that same amount of money with a one-year loan.
However, a long repayment period also means paying more for the loan overall. As we mentioned above, a loan that’s outstanding for a longer period of time is going to accrue more money in interest. You will have to balance affordability with the overall cost.
3. Do these due dates work for me?
One of the keys to balancing a monthly budget is to make sure that you always have the proper funds in your bank account to cover your different bills. Minimizing those bills as much as possible an important step, but so is making sure that those bills are evenly spread out.
So when you’re applying for an installment loan, make sure that you get a sense of when the proposed due date for each payment is. If that date is smack dab in the middle of a period when all your other bills are due, ask if it can be changed. Your lender will very likely be able to work with you on that.
What if you’re already making loan payments and you realize that your due date is causing you a hardship? If that happens, you should still reach out to your lender to see what can be done. Ideally, you would have enough money in your accounts to not feel the pinch in those couple days before payday, but many people don’t. And that’s okay.
4. Are there pre-payment penalties?
We mentioned earlier that paying off an installment loan early will save you money. But if there are prepayment penalties, it might not!
Prepayment penalties are fees levied by a lender on a customer who pays off their loan early. Since lenders lose out on extra accrued interest when a loan’s principal is paid off ahead of schedule, these penalties help their bottom line.
That’s understandable, but prepayment penalties also disincentivize responsible financial behavior! If you have the money to pay off a loan early and save yourself extra money, you should do that! Take it from us! We write about how people can save money all the time.
Prepayment penalties aren’t a deal-breaker by any means, but it’s certainly a “con,” not a “pro.” And if a lender is charging them, you’ll want to read your loan agreement extra carefully to make sure there aren’t any other surprises in store.
5. How do other customers feel?
When you buy a new appliance off Amazon, you read the customer reviews first, right? Well, why wouldn’t you do the same with an online loan? Or a loan from a brick-and-mortar bank, for that matter?
Before you put your signature on any loan agreement, you should do some digging on the lender to see what other customers are saying about them. You can do this by visiting sites like LendingTree, visiting their BBB page, checking out the company’s social media pages (including their mentions) and by scanning their Google reviews.
Don’t just trust what any lender tells you in their advertisements. Do your research and find out how they’re performing out there in the real world. That way, you can borrow with confidence, knowing that you’ve found the right installment loan for you.
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