If you’ve been short on cash and needed to make a large purchase, installment loans may seem like an attractive option. But there’s more you need to know about installment loans before taking action on one.
What Are Installment Loans?
An installment loan is a loan that you take out, usually in cash, which you then pay back in regular payments called installments.
They are NOT like personal lines of credit, which allow you to borrow against them and pay the balance later. This is a revolving account, rather than a loan with a set repayment date.
They are NOT like credit cards. This, like the line of credit, is a revolving account.
Who Offers Installment Loans?
Most lenders offer some kind of installment loan, however, most banks and large financial institutions offer them for a purpose. The typical installment loan is usually sold by banks as a personal loan, and these tend to have pretty attractive APRs.
General purpose installment loans, where you get cash and have to pay back in installments, are also offered by so-called ‘payday lenders’. However,
How Are They Different From Payday Loans?
Payday loans get their name from being cash loans that are then owed at a later date in the near future, usually corresponding with the payday of the borrower.
Payday loans require you to pay back the loan in full, plus interest, at that date.
This differs from installment loans because installment loans have you pay down the balance in installments, rather than in full.
Predatory Practices with Installment Loans
- High interest rates. Some installment loans have interest rates that make them seem more like credit cards.
- Additional fees for late payments. This is how they get most people: they charge exorbitant late fees and then charge interest on those late fees, compounding over and over until the loan gets too expensive for the borrower. At which time, they will take the debt to collections.
How to Avoid Trouble With Installment Loans
- Don’t borrow from payday lenders. “Money mart” type places are horrible places to get installment loans, but they could be your only option if your credit is poor.
- Don’t get caught in the trap of refinancing them over and over. It’s common for people to get underwater on installment loans, and try to refinance them for lower interest rates. While doing that to avoid paying too much is fine, many people use that in order to compensate for the fact that they can’t afford the payments.