Are Installment Loans For Bad Credit A Good Choice?
Installment loans are popular lending products that feature fixed monthly payments that can help you retire your debt for good.
This type of financing doesn’t exclude bad credit customers from applying, but is it right for you? Let’s take a look at this option in more detail to help you make the best possible choice.
Installment Loans Vs Payday Loans
Installment loans grant you the opportunity to borrow a lump sum and repay it over a fixed period. On the other hand, payday loans typically require you to pay back the money you borrow within a few weeks. To help you compare these two lending products, we’ve compiled some of their details in the table below.
Factor To Consider | Installment Loans | Payday Loans |
Typical Loan Amount | $1,000 - $50,000 or more | Usually less than $2,000 |
APR | 8% - 40% on average | Can exceed 300% |
Repayment Period | 6 months - 5 years or more | Typically several weeks |
Affordability | Reasonable - determined by your FICO score | Can become extremely expensive if not settled by the due date |
While payday loans may be quick and convenient, they have several limitations that are worth noting. For instance, they have extremely high APRs. If you need to borrow a significant amount of money and repay it over several months or years, you’ll want to opt for an installment loan.
Choosing The Right Installment Loan
The sheer number of loan providers in the market can make it difficult to know which product to choose. Here are some important things you’ll want to keep in mind when you make your choice.
Compare Fees And APRs
Borrowers with low credit scores need to be aware of the important trends in the lending market. For instance, the lower your FICO numbers, the higher your loan’s interest rate, and other fees will tend to be.
- You’ll often see a figure known as the APR (annual percentage rate) associated with various lending products. This number, which is almost always a percentage, shows the total cost of interest and fees as a proportion of the amount you choose to borrow
- By comparing the APR, you can get an approximate idea of how expensive it’ll be to borrow funds from a certain lender. It’s important to note that a lending institution isn’t required to include all of its fees in the APR that it publishes
Once you’ve narrowed down your choice to two or three companies, you’ll want to visit each of their websites or call them to confirm exactly what costs are associated with the loans you’re interested in.
Select The Right Loan Term
When you apply for financing, you may notice that you can select the number of months or years over which the amount will be repaid. Be sure to select a lending term that suits your financial situation.
- When you repay your installment loan, the total amount you borrow will be divided by the number of months in your product’s term. Thus, you’ll pay a fixed monthly amount that shouldn’t fluctuate. For this reason, you’ll find that your monthly payment decreases If you select a longer tenure
- However, choosing a longer term can result in a more expensive loan overall since you’ll be paying interest on the outstanding balance over a greater number of months. You’ll want to compare the benefit of lower monthly payments against the overall cost of your lending product
Weigh Up The Benefits Of Each Lender
Low APRs and generous loan amounts aren’t the only things that make a good lender. Before you choose a lending company, you’ll want to think about each institution’s pros and cons. You’ll then need to decide which one seems to offer the best deal overall.
- Choose a lender that reports to the credit bureaus. Most loan providers will report your payment history to Experian, Equifax, and TransUnion. That’s good news if you make your payments on time each month because your FICO score is likely to increase. It’s worth noting that late payments could result in a lower score, though
- Don’t forget about perks and added benefits. Some lending product providers will offer you refinancing options and competitive APRs while others may have discounts and other benefits. Check each lender’s website to find out exactly what perks they offer
The Bottom Line
Installment loans are an excellent option if you need to finance emergency expenses or purchase items that your budget doesn’t allow for.
Choosing the right lender and an appropriate tenure will help to keep your repayments affordable. Additionally, you can boost your credit score by making your payments on time each month.
