Installment Loan and Its Benefits Over Credit Cards

Financial management is a hard nut to crack for those who do not understand the intricate world of economics. Some even find it daunting to wrap their heads around debt structures, the various debt products, and their many functions. The two most common forms of debt are revolving debt and installment loans. Credit cards, the perfect example of revolving debt, have stark differences from installment loans. However, not many are aware of it, although it is paramount to know these differences to manage debt effectively.

A credit card lets a client pay for purchases and payback along with the bank charges. An installment, on the other hand, requires you to make partial payments at regular intervals. In the case of an installment, the payer agrees on the scheduled payments. Read on to know what an installment loan is and how it is ideal for those who want to tackle their debts strategically.

What Is an Installment Loan?

An installment loan is a money a customer can pay over a fixed pre-agreed period. Everything from the loan tenure, interest rate, and payment per term are agreed upon. Terms of the loan may vary from as little as three months to as long as thirty years.

You can negotiate these terms at the time of signing the deal. It is thus imperative to thoroughly understand the fundamentals of installment loans. This way, you can make an informed decision on how much you can borrow, the rate of interest, the repayment periods, etc. You can also calculate the impact of your monthly payment on your finances.

Types of Installment Loans

Installment loans are of various kinds. Each of them comes with a different purpose, terms, and conditions. The three main types of installment loans are personal, mortgage, and auto loans. Tribal installment loans are the less popular type of installment loan that is offered by tribal lending entities. Tribal regulatory authorities independently regulate these.

Personal Loans

Personal loans serve a wide gamut of purposes. They give you extra money for everything from education to home repair. You can borrow money for a fixed term of payment and fixed interest. Once the whole amount is paid off within the fixed time, you can consider your debt paid. Home loans are another form of a private loan that people use for constructing a new house, repairing, or maintaining an existing one. Student loans are also a type of personal loan and are useful for paying education costs. However, personal loans bear a comparatively higher interest rate in comparison with other investments. That’s because these loans do not need any collaterals.

Mortgage Loans

Such loans are necessary to clear mortgage payments. It usually comes with a fixed term of either 15 years or 30 years. A 15-year mortgage loan comes with a lower interest rate than the 30-year one.

However, the monthly payments will be substantially more than the 30-year mortgage. The advantage of mortgage loans is that it offers a fixed-rate loan that does not let your monthly installment fluctuate. This is an excellent advantage in the changing interest rate environment. So clients are aware of the exact monthly payment they need to make.

Auto Loans

As the name explains, it is a loan for helps consumers to purchase automobiles. It has varying interest rates and loan tenures. Your loan tenure can be anything between 36 and 72 months in the case of auto loans. Customers can choose between a short term loan with low-interest rates or a long term loan with high-interest rates. A longer-term reduces the monthly payment amount while the same increases for short-term loans.

Why Should You Opt for Installment Loans?

The advantages of installment loans greatly outweigh its minor disadvantages. It is especially true when you compare it with credit cards. Installment loans are ideal for revolving debts for fixed-price purchases that cost much more than a credit card can cover. Installment loans are also much more secure than credit cards. The on-time monthly payments not only display the customer’s responsible payment history to possible lenders but also aid in maintaining a credible credit score.

Furthermore, the terms of loans and interest rates are often adjustable as per the client’s requests. Also, there remains no outstanding credit, as in credit cards, once you pay off the debt altogether.

The only possible downside of installment loans is that they have additional charges. For instance, you might end up paying charges like penalty fees, origination charges, and late fines. Installment loans are critical financial tools that come quite handy in debt restructuring or management. They come with distinct advantages over credit cards.