An installment loan is a loan that combines the principal loan amount and interest amount with an interest rate assigned with the loan. That total is then scheduled to be paid back in equal amounts over a set time frame. Typically, these loans are repaid monthly and may require some form of collateral.
Several variables determine an installment loan’s monthly payment mainly due to the interest rate associate with the loan. Two most important factors are:
- Your credit score affects the interest rate you receive. The better your score, the better your rate may be.
- The amount you borrow and the loan term are also factors that affect repayment. The interest rate would likely be higher if the loan amount is smaller such as Payday or Car Title loans. The loan amount of Payday loan ranges from $100 to $1,000 and typical Car Title loan is at $2,500. The actual interest amount (Loan amount multiply with interest rate) be smaller with a small loan amount. For example, the interest amount of typical mortgage loan of $300,000 is $30,000 at the interest rate of 10% compare to $10 of interest amount of typical payday loan of $100 at the interest rate of 10%. It would make difficult to operate for the Payday and Car Title loan lender with such small interest amount.
Payday or car title loans may be considered installment loans. But payday and car title loans tend to have short repayment terms. Typically payday loan is due within 30 days or less. However, Car Title loans are like traditional installment loans, such as personal loans, generally have longer repayment terms ranges from 12 to 48 months.
Payday loans vs. traditional personal installment loans
- Many traditional personal installment loans have stricter qualification requirements. You can expect lenders to check your credit history and request proof of income. Payday loans are easy to get qualify and most of payday loan lenders don’t check credit history. The payday loans are likely approved as long as borrower has an income.
- Approval time is much faster for Payday loans compare to traditional personal loans. In fact, many of payday lenders offer the same day funding.
- Applicants are often approved for more money than they need, which leads to the temptation to borrow excess funds.
- Traditional personal Installment loans may require collateral, such as a certificate of deposit (CD) or savings account or the equity in your home. That puts your assets at risk if you are later unable to repay the loan.