Even if you’re not familiar with the term, you probably know something about installment loans. You may have even had one. If you own a home with a mortgage or have ever financed a car, those agreements to repay a debt over time are installment loans. Unlike your credit card payments, which can vary month to month, installment loan payments are more likely to remain consistent throughout the length of the loan. When you borrow money with a fixed interest rate, you pay it back in installments that include principal and interest.
Principal and Interest on Installment Loans
The two components of an installment loan payment are principal and interest. You borrow money, and through a process called amortization, your debt is reduced over time. The principal is the money you borrow, the interest is the cost of borrowing.
There are two types of interest: fixed and adjustable rates. With a fixed rate, the interest remains the same for the length of your loan. An adjustable-rate interest rate can vary—down or up—throughout the loan, and your monthly payment can also go up or down. Additionally, interest may be calculated either as interest-bearing (as described below) or precomputed, based on state law.
When you have a fixed interest rate, although your monthly payment will remain consistent, the ratio of principal-to-interest changes. At the beginning of your repayment schedule, the money allotted to interest is higher because the amount of principal outstanding is highest at the beginning of your loan. As you make payments, the principal you owe is reduced and the interest that accrues on it is correspondingly less.
To help it make more sense, consider this example: If you borrow $10,000 at a fixed 5% interest rate for five years, your monthly payments will consistently be $188.71. Calculated against the initial cost of principal and interest, that very first payment will incur approximately $41.67 in interest while approximately $147.05 goes toward your principal or paying down your balance. However, as you make payments when they are due, you reduce the principal balance, and the calculated interest is proportionately reduced. In this example, by the time you’re a year into your payment plan, your 12th monthly payment for interest is $34.14, and the money paid toward principal is $154.57; a year after that, your 24th interest payment is $26.24, with $162.48 going toward principal. With an interest-bearing loan, it is important to know that interest accrues daily on your principal balance, so late payments may result in additional interest or late fees.
Even though your payment amount remains the same for the length of the loan, you may be able to reduce the amount you pay toward interest and shorten the term of a loan if you make additional payments toward the principal. Check with your lender to ensure there is no prepayment penalty and ask how you could make additional payments toward the principal. Some lenders will allow you to add additional funds to your monthly payment. Be sure to check with your lender, though.
Examples of Installment Loans
There are many kinds of installment loans, including:
- Home Equity
- Debt Consolidation
- Personal Loans
Personal loans can be secured (e.g., with a car or other personal property) or unsecured and can be used for a wide variety of needs. You might use one to buy a car or pay for a vacation.
How to Get an Installment Loan
The very first step in securing a personal loan is getting a clear picture of your financial wellness. Before you apply for a loan, you may want to request a free credit report from one of the three credit reporting agencies: Equifax, Experian, or TransUnion. If you notice any discrepancies, address them with the banks, companies, or agencies.
Once you have a sense of where you stand financially, conduct research to determine lenders that might be able to provide you with a loan. Consider their history, reputation, and customer service. Compare terms and rates. And when you’re ready to apply, make sure you have all the components required by the lender. They may include:
- Valid, government-issued photo ID that proves residence and age (you must me at least 18 years old)
- Social security card
- Proof of income
- Recent tax return
How Long Will It Take to Get My Installment Loan?
Although processes and length of approval time will vary with lenders, as long as you submit a complete application, some lenders can give you an answer in one business day. Response times may vary based on your individual application and the volume of applications received when you apply. Upon approval, you can secure funds once all the paperwork is complete.
Are you looking for an installment loan to buy a car, pay for unexpected expenses, or consolidate debt? Whatever the reason, Mariner Finance may be able to assist you. Find your local branch now.