To a lot of people the terms used in the banking industry can be confusing. With all the different types of loans, terms and requirements it can definitely become overwhelming. Today, we will look at installment loans and explain exactly what they are.
There are different levels when it comes to installment loans. They are categorized based on the customer’s credit rating. The different categories are as follows:
- Bad Credit (Charged off accounts, Late payments, Repossessions, Foreclosure)
- Poor Credit (Slow payments, no credit etc.)
- Subprime Credit (Not Good or Bad, Kind of stuck in the middle)
- Good Credit (Timely payments and considered a good risk to lenders)
- Excellent Credit (Can easily borrow money at the lowest rates)
Think of subprime as the middle of credit scores (600-700 FICO Score) and anything below subprime credit will require a specialized lender. These specialized lenders have programs designed to offer installment loans for bad credit – arcct and can usually help people with bad and poor credit scores. Of course these are extremely high risk accounts to the lender so the interest rates will be higher and generally depends on the severity of the credit problems.
Subprime credit is not good or bad and people falling within this range can usually get financing through certain banks, lenders or credit unions. Most lenders realize there is a certain amount of risk with subprime customers but will definitely take into consideration the age of their credit history and how well they have made their payments. This customer can obtain a loan at a decent interest rate.
Good and Excellent credit customers are basically 0 risk to a lender. They have a very established and aged credit history that is very balanced with installment loans and revolving accounts like credit cards. In most cases this is the customer that can buy a new car with $0 down payment and 0% interest.
Now that we have categorized the various classifications of credit and how it can correlate with your interest rate let’s look deeper into this type of financing. Installment loans are also known as personal loans so don’t get confused if you hear the different verbiage. An installment loan is a predetermined loan amount that is repaid over a specified time with a specific number of equal installment payments. It might sound confusing but it is a really simple concept to understand.
Let’s say for example you want to purchase a house, car or other large item purchase, you will need an installment loan (personal loan) to be able to make such a large purchase. With an installment loan you will need to borrow the amount of money required to make the purchase from a bank. You and your lender will come to an agreement on how much money you can afford to pay each month and these payments are known as monthly installment payments.
If your lender has determined that you are a good credit risk and decide that they want to grant you a loan they will then look at your monthly budget to see how much money you have left over each month. If your budget shows that it can handle the additional monthly payment then the lender will begin structuring your loan. The loan structure will depend on the type of loan you are wanting and how much payment your budget allows. Here is a general guideline for various types of installment loans.
- Small Personal Loans (Less than $5000)/ Can be a few months to 5 years
- Car Loans (Can range from 3-8 years)
- Mortgage (Up to 30 years)
So basically any installment loan lender or service like https://www.arcct.com/installment-loans.html will look at the loan type you are wanting and determine if he/she can fit your budgeted monthly payment within the time allotment for such a loan. Let’s look at a small personal loan ($5000) for example.
There will be additional charges like document fees, interest rates (base on your credit worthiness) etc that are added to the original $5000 loan request. So, let’s say you have average credit and the lender decides they will waive the document fees and charge you a 10% annual interest rate. This interest rate calculated over a 5 year loan will come to an additional $1374.11. Therefore, the total amount you are borrowing is $6374.11.
Since your lender is required to stay under a 5 year (60 month) timeframe the minimum payment that will be due for the next 60 months is $106.24. So if your budget can absorb this additional payment comfortably the lender will probably go ahead and approved your loan.
Of course, there are additional things you want to discuss with your lender. You will want to know if there are any pre-payment penalties which are basically a penalty for paying the loan off before the 5 year term. If there are no penalties you may want to pay a higher monthly payment to save some money on interest charges.
So essentially you have entered into an ‘installment loan’ contract with your lender! The lender has told your I will loan you $5000 at a 10% Annual Percentage Rate for 5 years (60 months) and your payment will be $106.24 for the next 60 months.
Remember what was said above and add the numbers into it:
An installment loan is a predetermined loan amount ($5000) that is repaid over a specified time (5 yrs) with a specific number (5 yrs = 60 payments) of equal installment payments ($106.24).
So imagine how much money you can save on interest alone if you work on pushing your credit score higher. The savings is substantial especially when you are talking about long term loans such as mortgages.
This same simple installment loan principal applies to other loan types such as car or home loans. Basically, the only thing that changes is various charges that are rolled into the loan. A car for example will also have TTL (tax, title and license) fees and a home loan will have PMI (private mortgage insurance) fees etc.
All lenders under federal law are required to discuss any and all fees with you under the Truth in Lending Act (TILA) and make sure to ask any question you have.