The installment loans have introduced in the lending market for a long time. The flexibility of paying the loan amounts with a set number of payments, made the loan plan popular within a very short time. Almost all kind of loans available in the market now provide this loan facility for the borrowers. Despite the advantages, some shortcomings are also due with the installment loans. Some People prefer payday loans over installment loans, considering their situation. Still, the demand of installment loans promises that it is going to be in trend for long. Any wise financial person should consider the pros and cons of loans, before taking one. This discussion tries to clarify the bright and dark parts of installment loan, for helping the individuals who are considering this loan option.
Quick Access - Full Guide
- 1 What is an installment loan?
- 1.1 The major benefits of installment loans:
- 1.1.1 Few requirements to meet:
- 1.1.2 Provide quick access to loans:
- 1.1.3 Big or small, borrowers can take any amount:
- 1.1.4 The liberty of choosing a repayment plan:
- 1.1.5 Refinancing the loans:
- 1.1.6 More flexibility than other available unsecured loans:
- 1.1.7 Hidden fees of the loans:
- 1.1.8 Small loans make the consumers to pay more:
- 1.1.9 Risk of getting into the vicious circle of loans:
- 1.1.10 Renewal of loans increases interest rates:
- 1.1.11 Selling high price insurance towards the clients:
- 1.1.12 How to deal with cons?
- 1.1.13 A small tip:
- 1.1 The major benefits of installment loans:
What is an installment loan?
The installment loan is the kind of loan that comes up with a certain number of scheduled repayments to be paid over a given time. The number of repayments may vary ranging from minimum two. The time span of the loan can range from few months to 30 years maximum. Suppose, a borrower has taken an installment loan of $500 at an interest rate of 10%, with additional $50 other loan charges. So, in total, the borrower will have to give an amount of $600 for repaying the loan. If the borrower gets a time span of two months with two scheduled payment dates, he will have to pay $300 in each installment. The borrower will find it easier to pay $300 each month than paying $600 all at a once.
For example: when a borrower takes a mortgage loan, he can have a maximum time span of 30 years to pay the loan with multiple numbers of scheduled payment dates. So, mortgage loans are kind of installment loans. Not only mortgage, almost all traditional consumer loans come up with this loan repayment system.
The major benefits of installment loans:
The federal government of US has also acknowledged this loan service as designed to end the practice of predatory lending. They claimed in the report that this loan service allows common people to properly utilize the benefits of loan and ends unsafe and hard to afford loans like the payday loans, title loans, credit card loans etc.
Below, there is a description on some key reasons for which the installment loans are considered as very beneficial:
Few requirements to meet:
The major reason, for which the installment loan has become so viral among the borrowers, is that it demands few requirements from the borrowers to qualify for the loan. Minimal loan criteria have enabled almost all financial class of people to get access to this loan.
Provide quick access to loans:
The installment loans come up with quicker access rather than other available loan options. The flexible options that come up with this loan allow people to show less financial guarantees. Loan providers do not look for a lot of document and thus review them quickly. So, the loan approval time is short for an installment loan. Usually a borrower can get the approval of loan within 3 to 7 working days after application.
Big or small, borrowers can take any amount:
The installment loans can be taken in a small amount or a big one, depending on the need of the borrowers. In most cases, the loan assistance service used to cover bigger amounts before the introduction of inspirationfund.org installment loans. So, borrowers can now think about taking loans when they need small financial assistance with the privilege of installment loans. The opportunity of getting a small amount as loans on installments has actually allowed the low-earning people to take the help of loan assistance in their financial problems. A market research reported that in 2012 fiscal year, the lowest amount to be disbursed as a small installment loan was $1180. So, disbursement of little amount as installment loans has expanded the scope of accessing loans for the low earning individuals of the country.
The liberty of choosing a repayment plan:
The borrowers of installment loans enjoy the liberty of choosing repayment plans according to their capacity. People who have a low earning can increase the number of repayments and time. It will allow them to solve their financial problems without creating much impact on regular budget as they have to pay a very small amount every month for repayments. People, who have a high income, can take a small time with few numbers of installments. Less number of installments allows the borrowers to spend less on additional costs of loans and thus they can save a good amount of money.
Refinancing the loans:
The installment loans are not one time fixed loans. One can reutilize the benefits of these loans by getting a refinance. A refinance means rolling over a new loan into an existing one. When the loans reach to the maturity, the borrower can renew the loans and utilize them for new financial purposes. Among all other refinance loans, the second mortgage, the mortgage refinance or the home equity line of credit is considered as the most efficient and beneficial. On a second mortgage, the borrowers can take out an amount of loan that is equivalent to the current price of the home they bought with the first mortgage. The borrowers use their home as collateral; take an equity line of credit for the home, and starts paying for the second mortgage with new loan conditions. Such refinancing opportunities grant the borrowers to meet big financial purposes like home improvement, small business investment etc.
More flexibility than other available unsecured loans:
The installment loans come up with more flexible conditions than other sorts of unsecured loans available in the market. It has a low rate of interest rate compared to other unsecured loans. Few paper works, loan procedure fees are also the bright sides which makes the loan very handy for borrowers. Also, regular repayment of the loans can increase the credit score of the borrowers.
Before you rush to avail an installment loan for yourself, after understanding all these advantages, the financial experts of Coalition for Consumer Choice will suggest you to take a pause and look at the dark parts of the loan as well. The financial experts have taken an in-depth look on this loan category and have revealed that borrowers can also face some dark side while availing this so-called safest form of consumer credit.
Listed Below is the description of some possible bad consequences faced by a borrower of installment loans:
Hidden fees of the loans:
Lenders who look for making illicit profits from the loans find more room to do so with installment loans than other loans. The installment loan lenders sometimes charge high amount of interest rates, unnecessary add-on fees or services with the loans, flipping the loans or do other deceptive tricks to drain out money from the borrowers. The borrowers do not understand that they are actually paying a very high amount for the loan, as they pay a little amount on installments. The hidden fees of the loan can cost the borrowers a huge amount of money than what they have taken as loans.
Small loans make the consumers to pay more:
The money lenders make huge profit by charging a high rate on small installment loans. Since the robbery is done by petty amounts, people do not understand the significance. Sometimes people end up paying 50-75% of the total amount borrowed as loan charges. This should be considered as a huge mark up while the credit card interest has reduced to average. The total scenario can only be understood if someone considers the fact that, in a fiscal year a well-established money lender disburses more than thousand small installment loan deals.
Risk of getting into the vicious circle of loans:
The market experts have seen that there is a tendency of the small installment loan lenders to lure their clients into a loan cycle. The small installment loans are assumed as one time solution for a financial crunch. The reality is different. These loans can be renewed or rolled over to new loans, just as payday loans. The loan lenders show great skill in convincing their clients to come back for more financial assistance. According to recent statistics, 75% of the total loan volume of a money lending company comprises of refinanced loans. The small loan lenders are pretty aggressive about convincing their clients to make refinance of the loans continuously. Refinancing a loan again and again also gives the opportunity of money lenders to get extra loan costs.
Renewal of loans increases interest rates:
The payment structure of small installment loans are done in such manner, that a borrower will end up paying more interest right after renewing the loans. So, when the borrowers take serial refinancing on loans, they get an increase on monthly installment payments, but that increase do not make much scratch on the capital of the loans. The consumers take the loans with the promise of getting an affordable product but end up paying a major share of income for the loans every month. The payment of APR rate can go more than 500% of the capital of the loan in this manner.
Selling high price insurance towards the clients:
Recently, the credit card lenders were very much criticized for their tendency of handling expensive insurance deals to the clients as add-ons. The federal government put various restrictions on the credit card lenders about selling such add-on deals to the customers. Looks like, the scenario is pretty much similar in some small installment loan lender companies, but it skipped the sight. Yes, the loan marketers throw high price car insurance or other protection policies to the customers as an addition to the loan deals. The installment loan lenders keep themselves clean by keeping the additions as optional, but they do not reveal this information to the borrowers.
The proliferation of profit by using these dark strategies on installment loans is becoming evident every day. As a result, new money lenders are coming into the market to rob more people. Payday money lenders or other types of money lending business are shifting their business to installment lending services.
How to deal with cons?
As there are problems, there are also solutions to deal with the cons of getting a small installment loan. Such as:
- First of all, a borrower has to be very careful while reading the loan conditions specified on the documents. If there are any provisions of hidden cost, it can be revealed through a keen look of the papers. The borrowers can also take the help of loan experts in exchange of little amount of money.
- The borrowers should consider small time spans to repay the installment loans, so that they do not pay on the loan charges more than the capital amount.
- The borrower should consider the loans as one-time fixed loans. Refinancing on a small amount loan should not be considered by a borrower.
- If the loan providers are forcing to buy any add on service, the borrowers must enquire about it.
- The negotiations about the loan conditions should be specific, clear and documented. By a specific and clear negotiation, a borrower will get detail idea and thus understand any illicit activity done by the lenders during the repayment time of loans. The documentation of the negotiations will help the borrowers to provide reference, in case of any inconvenience.
A small tip:
The financial expert suggests that considering installment loans for taking out a small amount is not an economic decision. A borrower should always consider the option of taking an installment loan, when they require a big amount of money. It is not easy to make room for illicit profits for a big amount of installment loans. For small amount of loans, the options of payday loans or the credit cards loans should be considered.