An installment loan is a type of loan where you receive the full amount in a lump sum and then repay the loan with interest over fixed payments (usually month-by-month), known as installments.
Installment loans encompass products like student loans, personal loans or mortgages. Let’s take a closer look at the finer points of installment loans so you can figure out whether they’re the right choice for your financial needs.
How does an installment loan work?
Eligibility for an installment loan depends on specific factors, including your creditworthiness and income. These factors will also determine the interest rates and loan terms offered to you.
With an installment loan, borrowers only receive a payout once. Once they repay the loan, the account is closed.
Types of Installment Loans
Many different credit products fall under the umbrella of installment loans. All these loans involve a one-time disbursement of funds coupled with repayment in fixed installments. Here are some installment loans that you may have come across.
Secured Installment Loans
Secured loans require the borrower to provide collateral that the lender can possess if the borrower defaults on the loan. If the borrower cannot repay the loan, the bank may repossess the collateral to recover the amount owed. The same is true for other secured loans, such as car loans.
A mortgage is a secured installment loan that allows you to purchase property, with the property functioning as collateral. Borrowers typically repay mortgages in fixed monthly payments over 15 to 30 years. Eligibility and loan terms are subject to the borrower’s creditworthiness and income. The property’s appraised value may also determine some of these factors.
Auto loans are secured installment loans that use the vehicle you’re purchasing as collateral. You take out a loan to pay for the car upfront, then make monthly payments to your lender to repay the amount borrowed plus some interest.
Unsecured Installment Loans
Unsecured loans do not require collateral. Instead, the lender evaluates the borrower’s creditworthiness and income to determine their credibility. Since lending without collateral can be riskier for banks, they may require better credit and charge a higher interest rate.
Personal loans are unsecured installment loans that you can use for various purposes, from home renovations to car repairs. Personal loans may also be effective in consolidating credit card debt, depending on the interest rate of your credit card balances. Many lenders offer loans ranging from $2,000 to $100,000. Depending on the loan terms, you can repay these personal loans over 12 to 60 months.
Benefits of an Installment Loan
There are a few key benefits to installment loans that can help you determine if they’re right for you:
Fixed monthly payments: Fixed interest rates and predetermined monthly payments make it easier to plan your monthly budget.
Credit improvement: Installment loans may help diversify your credit mix. Making timely payments on them can also help you build good credit.
Refinancing opportunities: If you’ve recently improved your credit or have noticed interest rates declining, you may be able to use an installment loan to refinance a higher interest loan you already have. You may also have the option to consolidate debt from credit cards and repay the debt with less interest.
How do you get an installment loan?
First, you may want to examine how much you need to borrow and how long you would take to repay the sum. This should help you determine what loan terms are the most suitable for your situation.
Then, compare different lenders to see the best rates and terms you can get. Some lenders may offer online pre-qualification, which helps you determine whether you may qualify for a loan. Since pre-qualification uses a soft credit inquiry, it won’t affect your credit.
After that, you’ll apply for the loan, where you’ll provide key information about your credit and finances. If approved, a lender will tell you what terms they can offer, and you can decide whether to move forward with the loan based on the offered terms.
With Citi, you can easily apply for an installment loan online. To apply, you must be 18 years of age (or 21 in Puerto Rico) and provide proof of your identity, home address, employment, and income. If you meet the required creditworthiness and minimum income requirements, you could be eligible to electronically receive the funds into your Citi account the same day. Simply log in to your account, submit your application, and you can get a result within just 60 seconds.
When should you consider an installment loan?
For a one-time expense with a clear cost, an installment loan may be a viable option if you can secure the funds you need at a reasonable interest rate.
Before you take out an installment loan, though, it’s important to examine what interest you may accrue and what fees are included. A loan with high fees may be impractical for some, especially if the fees must be paid upfront.
Frequently Asked Questions
What can I use an installment loan for?
Installment loans can be used for financing purchases, consolidating debt or covering emergency expenses.
Different types of installment loans are available to suit different requirements. Check with your lender before applying to see how the installment loan can be used.
What happens if you pay off an installment loan early?
You can pay off your installment loan early if you want to, and it may seem like an obvious way to reduce the interest you pay overall. But remember that personal loans may contribute to your credit mix and the average age of credit accounts.
Some lenders also charge a pre-payment fee to those who pay off their loans before the term ends. You should check with your lender before repaying your loan prematurely.
Disclaimer: Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.