Getting a loan is easier now than ever before, but getting the right type of loan for your financial needs is still as difficult as ever.
That’s because there are not only a ton of options out there, but also there are a lot of nuanced differences between them.
For example, should you put it on a credit card, buy it with a line of credit, pay cash, or take out an installment loan?
When it comes to certain purchases in life, some options are better than others and not everything can be solved with a credit card.
An installment loan is often a preferable option to a credit card in that it gives you the ability to control your monthly payments as well as how much you spend in total.
Unlike a credit card, installment loans cannot have new debts added to the balance – they are fixed amounts that a borrower agrees to pay back, not a revolving credit line.
Because of this, their interest rates are often lower and many borrowers use them to pay off credit cards and other debts as part of a consolidation.
Usually, in a fixed lump sum at an agreed-upon interest rate with a certain monthly payment over a specific and closed period of time, installment loans are not for the financially undisciplined.
We’ve compiled ten things you might want to keep in mind prior to taking out an installment loan as opposed to using a revolving line of credit (credit card) or even cash
10. The Interest Rate Might Be Higher Than Expected
Installment loans are often preferred by consumers because they carry lower interest rates than other types of loans. But this isn’t always the case. You will want to check to make sure your installment loan is actually a good deal and, if it isn’t, whether or not a better payment option is available to you.
9. Check the Impact It Might Have on Your Credit
Before you even check to see if you qualify, ask if there will be a credit inquiry. Even an inquiry into your credit history can have an impact on your score so make sure you know what the lender is looking for prior to initiating any paperwork.
8. Debt is not a Solution to Debt
Using an installment loan as a way to consolidate existing debt is often a great idea depending on the terms of the loan, but debt is not a solution to debt in and of itself. Be careful with layering multiple loans on top of each other.
Remember: Installment loans come with fixed payment amounts at fixed time periods. They’re often not nearly as flexible as a credit card or other type of loan because you have to stay on an amortization schedule to successfully complete your end of the bargain.
7. Multiple Options
Research other funding options outside of an installment loan in order to give you the best overview of what your financial options are.
6. Source of Needed Funds
Loans can really help you out in a pinch but you need to have a plan. If you’re taking out an installment loan due to an emergency, you will want to consider everything prior to doing so such as how much you can borrow, how much you can pay back and how often, and what specifically you are going to use the funds for at the end of the day.
5. Loan Consolidation Could Save You Money
Loan consolidation can save you money and even free up money in your monthly budget. The best feature of installment loans is that they are at a fixed payment amount every month. Whereas a credit card bill’s minimum could go up depending on whether or not you spend or pay down your bill, an installment loan’s monthly payment stays the same thus making it a predictable feature of your financial life.
4. Measure Your Loan Payment’s Impact on Your Budget
How much will loan repayment take out of your wallet every month and are you ok with that are two questions you need to answer at this stage. This isn’t just about being able to afford it. It’s more about can you commit to sending out the specified loan payment over the time period you’ve committed to doing so.
That means you have to come up with the same amount of money – every month – without fail. For some people in more precarious financial situations, this is easier said than done and an installment loan might not actually be the best option for them.
3. Consider Other Sources of Capital/Cash
In addition to an installment loan, consider other sources of funding to help you achieve your goals. You might not even need a loan if you find out that it is easier or cheaper to put it on a credit card. Further, you may even decide to just save up and pay cash for your purchase rather than borrow money.
2. Pay Attention to Fees
Hidden fees and other insidious features of loans often make them more expensive than they first appear on paper. When getting an installment loan (or any type of loan), ask for a clear schedule of fees associated with the transaction. This often gives you a more realistic picture of the loan and how it will impact your life.
1. Go Into Debt for the Right Reasons
Before going into debt, make sure you are doing it for the right reasons and that you have explored all of your options. Often people search for loans or cash when they are in some sort of emergency or state of panic. Even then, it is important to approach it all with a clear head and a detailed understanding of what might work best for you.
In addition, you want to make sure that you borrow money for things that you need to borrow money for such as an emergency medical expense or another isolated incident. Don’t use borrowed money for personal purchases or for something that isn’t necessarily an emergency.