What Is an Installment Loan? Benefits & Guide
5 min read | 5 months ago
What Is an Installment Loan?
Whenever there is any specific financial need to meet urgently, it is no longer necessary to use up your savings or break investments. You can apply for quick and hassle-free online loans for diverse purposes. In this context, you may have come across the term installment loan. What does it mean? Here’s finding out in this article.
Meaning of an Installment loan
An installment loan is a specific agreement where the repayment happens over a particular duration through periodic installments/payments. They are helpful for those looking to make big or small purchases or meet other financial needs. These loans are better than credit cards due to their lower interest rates. These loans are more affordable and safer than payday loans and other open-ended credit.
The loan may help finance property or vehicle purchases and higher education. They can also be online loans to cover travel, medical expenses, weddings, gadget/appliance purchases, home renovations, business costs, and more. Borrowers get a lump sum amount after their applications are accepted by lenders. They can repay the loan in equated monthly installments (EMIs) over a set period. These loans offer a single amount, unlike credit lines/cards with revolving credit. The credit line is closed whenever borrowers repay the loan in full.
Installment loans have two types, namely unsecured and secured loans. The latter requires borrowers to pledge any collateral/security for getting the funds. It can be the property/vehicle bought or other assets like gold, stocks, and property mortgaged for the loan. Defaults or non-payment may lead to confiscation and loss of these assets. Unsecured loans do not require any security/collateral. Lenders sanction loans based on the credit score, income, repayment ability, and debt of borrowers. These are usually personal loans with comparatively higher interest rates than secured loans.
Benefits And Considerations Of Installment Loans
Installment loans have a wide range of benefits for borrowers. Some of them include the following:
- There is no need to deplete savings or investments for financial needs
- Secure and more affordable options than payday loans
- Lower interest rates than credit cards and other revolving credit
- Lump sum amount in hand for specific/varying purposes
- Better financial planning with pre-fixed loan tenure
- Lower interest rates for secured loans
- Faster processing and minimal paperwork for unsecured loans
While these are some of the main advantages of installment loans, there are also a few considerations worth noting. Remember to evaluate your total interest cost on the loan and compare interest rates before finalizing any loan product. Non-payment of secured loans may also lead to the seizure of the assets. Banks sell them to recover their dues in such cases. Another consideration is the loan tenure and amount. Choose them carefully based on your repayment ability.
You should also maintain a high credit score to get installment loans smoothly, especially unsecured funding like personal loans. Remember that even one missed EMI will negatively affect your credit score and repayment history. There are also additional loan costs in many cases, including processing fees, administrative costs, legal costs, etc.
Conclusion
Thus, installment loans are helpful options for those who wish to cover financial requirements or accomplish goals in the short or long term. However, adopting a responsible approach towards loan repayment is the need of the hour. If managed well, an installment loan can help you fulfill your commitments and cover various needs without any hassles.
FAQs
1.What are unsecured loans?
Unsecured loans are those which do not require any collateral/security. They are sanctioned based on other criteria like income, credit score, etc. Personal loans are an example of unsecured loans.
2. Are installment loans better than payday loans?
Installment loans are considered safer than payday loans since they are sanctioned by recognized lenders. At the same time, they are more affordable than payday loans that may have sky-high interest rates and other unfavorable terms.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
