Simply defined, installment loans are when people borrow money to buy an item they don’t have enough cash to purchase. Most folks don’t have sufficient money in their savings accounts to buy a car, a house, or a boat.

So instead of saving and waiting, they take out an installment loan at a lending institution. Yes, there are many places that lend people money for immediate purchases, and they charge interest at varying rates.

As a simple example, someone wants $12,000 to buy a car. They go to the bank or a site that offers installment loans online. The repayment fee is $1,000 per month for a year. The interest rate on that money is $200 per month.

They get to drive the car off the lot. The lender makes $480. Over 12 months, the person will pay $16,800.

History of Installment Loans

With sewing machines came installment loans. In about 1850, to make a shirt with a needle and thread took about 14 hours. With a machine, however, the time was reduced to an hour and a half. It is no wonder that the women of the time wanted sewing machines.

The machines cost about $40, which was more money than most people had. Singer introduced an easy payment plan. With a dollar down and a dollar a week people flocked to purchase the labor-saving machines.  Furniture stores quickly followed suit with similar loan options.

Although Ford produced Model T cars – that cost about half an annual salary – the company did not offer to finance. There was a demand, so lending institutions sprang up so that folks could buy a car on payments.

Borrowing on credit became so common that by the 21st century, very few people are without a debt of some kind.

What are the Benefits of Installment Loans?

The short answer is that it allows people to immediately purchase what they don’t have enough money to buy. Used responsibly, loans can fund a lifestyle that wouldn’t be possible without cash.

Investments – such as a mortgage or a student loan – are often the only way many people can buy a house or get an education. If need be, they can sell the house. Some people even view purchasing a house as “forced savings.” The education may help students to get better jobs and to earn more money.

Installment loans online are easy to organize. So, people can track their banking on their phones.

What are the Risks of Taking out a Loan?

While people start out with the intention of repaying the loan, life happens. For example, individuals may lose their jobs, have an accident or get divorced. Income that was counted on isn’t there, so the loan payment can’t be made.

Short of winning the lotto, life gets stressful for those who can’t pay their debts. The situation compounds when they have to borrow more money from high-interest institution to cover the payments.

In desperate situations, people have been known to make mortgage payments with their credit cards. Interest on the cards generally runs between 15 to 20 percent. Consequently, the repayment on the credit card to pay the loan grows quickly.

As people continue to spend more than they earn, the debt cycle gets wider and deeper. According to USA Today, the average household in the United States owes $137,063. The cost of living has risen by 30 percent over the last 13 years. Wages, however, have not kept pace with the increase.

What is a Credit Rating?

Just as sites like TripAdvisor, Glassdoor, and Air B&B – to name a few – have space where consumers can review a restaurant, a company or accommodation, financial institutions rate individuals.

Run by the Fair Isaac Corporation, the FIOC scale rates an individual’s credit. Factors include payment history, amount of outstanding debt, length of the loan, new credit, and what type of credit is being requested.

A forward-thinking idea is to start building credit early so that a favorable report is in place before needed. People can borrow small amounts they don’t even need and repay it to boost their credibility. That way, those shopping for loans already have a good track record of repayment.

The formula for a good credit rating is simple: pay on time. If something happens, let the lender know immediately. Then work something out to save your standing.

Those with a record of not paying promptly will end up with a bad credit rating. Once so rated, it is difficult to borrow money from a bank at a lower interest rate.

Other side effects of having bad credit include not being able to rent a place to live, get a security deposit for utilities or get a cell phone contract. And the worse the rating, the more the interest on future loans.

Installment Loans for Bad Credit

Installment loans can cost you.

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Individuals who have a bad credit rating may have to resort to payday loans. Think of these loans as modern pawn shops.

Payday loans are available online or from storefront lenders. The loans – generally less than $500 — are generally due on the payday.

Suppose someone needs to get a laptop fixed but doesn’t have the $250 to pay the repair bill. The person needs the computer for work. Desperate people do desperate things.

Installment loans for bad credit charge very high-interest rates. So, a loan of $250 at $50 per payday sounds like a good option. But rather than five equal payment, it is eight. So the initial loan of $250 adds up to $400.

Online Installment Loans

Since the rise of the Internet at the end of the 20th century, banking has been revolutionized. Whereas cash or checks were the only ways of payment, it is now plastic cards and Internet transfers.

Type “installment loans online” into a search engine and literally, hundreds of pages appear.

According to The Balance, installment loans online are changing the way people borrow for a number of reasons. First of all, time is a major consideration. Unlike filling in forms — either at the bank or online – that have to be reviewed by a manager, borrowing online is quick.

The lenders can tell borrowers how much they can borrow, what the repayments will be, and when to expect the money in their account in a few minutes.

Another reason for online installment loans is better interest rates. And everyone likes to pay less. It is up to the borrower to do the research, but with all the information on the Internet, it makes it so much easier to source an online installment loan. There are also customer comments and recommended online installment loan sites.

Approval is also easier with online installment loans than the traditional banks and credit unions. With technology, online loans are willing to take more risks. Different from traditional borrowing where the lender had to have collateral, online loans don’t repossess laptops or vehicles.

Unlike credit unions or banks, online sites only lend money. They don’t care about checking accounts, credit cards or business services. And since everything is done online, their overhead is considerably lower.

Think Before Signing

Installment loans eat money.

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Before picking up a pen or sending an electronic signature, at a bank on an online installment loan site do the math. IYou don’t have to be a rocket scientist to figure out the income and to estimate the outgoing. How much is left?

And it is a good idea to have a nest egg for a rainy day – just in case.

Escaping from the debt cycle is a long hard climb. Is the stress worth it?


Feature Image CC by Tumisu, via Pixabay