An installment loan is a borrowed sum of money that is repaid over an agreed-upon schedule by means of fixed payment amounts, called – you guessed it: installments. If you’re looking to borrow money without needing to pay it back right away, installment loans are a great option.
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Before applying, it’s best to get an understanding of how installment loans work. The borrower fills out an application, requesting the needed amount, and provides supporting documentation. The financial institution that provides the loan then sets the terms and conditions for repayment. Typically, the bank calculates the interest rate over the life of the loan and adds that figure, along with any other fees, to the amount borrowed to get the total cost of capital. That sum is then broken down into even payments based on the number of months or weeks the loan is set for. Once the terms have been agreed upon, the loan is funded, the business owner applies the funds to its intended uses, and the repayment period begins.
Monthly Payment = P (r(1+r)^n) / ((1+r)^n-1)
r: Interest rate
n: The number of payments in total
p: Principal (the amount of money you’d like to borrow)
An unsecured installment loan is based solely on the strength of an applicant's historical factors. From the bank’s perspective, it is a leap of faith, which naturally classifies it as a higher risk for non-payment. A secured loan will require that you provide the lender with some kind of collateral, like a vehicle or a home.
Your bank considers many factors when you apply for an installment loan:
The applicant’s income is steady and high enough to cover the repayment terms.
Personal and business credit scores show previous financial activity and gives a look at what the borrower’s financial health is.
Lenders are looking for applicants who don’t have a history of defaulting on a loan or filing for bankruptcy.
The applicant doesn’t have other obligations that may prevent them from repaying the loan.
Any other person or collateral that can help the applicant guarantee repayment.
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Installment loans are a fantastic way to access capital to help bring about financial well-being. Whether it is to finance purchases for your business, consolidate debt, pay for a vacation, or purchase a home, installment loans are an important mechanism for facilitating the overall economy and fulfilling the American dream.
PaymentCloud has supported thousands of businesses throughout the United States in securing business funding. Our business loan partners are experts in choosing the right funding solution for any type of business. If you’re looking to get in touch with a representative, it’s as easy as applying!
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Installment loans can stay on one’s credit report for up to seven years. How it affects your business credit score will depend on the outcome of the agreement.
Theoretically, as many as you could feasibly handle based on your income and other financial obligations. Though there are lenders out there who don’t have a limit on the number of installment loans one could have, most lenders place the cap at 2 per borrower. In an underwriter’s eyes, more than 2 installment loans can indicate irresponsible financial behavior.
Absolutely! All loans are funded on the strength of the application package. While credit is an important part of the application process, it is not the only factor that most think it is. To make up for less than ideal credit, a number of strategies can be applied to strengthen the application package, such as the addition of a co-borrower, a form of collateral, or even a higher interest rate.
No. Although credit is not an end-all-be-all deal breaker for installment loans, it is an important enough factor that it always needs to be considered for underwriting in determining the likelihood of repayment.
A payday loan is a short-term, high-interest rate loan that is secured by the borrower's upcoming paycheck. Because the paycheck is being used as collateral, these loans typically are for less than $1,000 and are paid off in full by the upcoming payday. These loans are essentially a fee for getting access to your future money now, whereas an installment loan is typically for a greater amount of money, with lower interest rates, that is paid off over a period of time with multiple payments, versus the one-time payback on the next paycheck.
Yes - SBA loans and small business loans provided by financial institutions are installment loans with set terms to help small businesses thrive.
You get the satisfaction of completing the agreement, the financial relief of no longer having to make monthly payments, the ability to save on interest, and an increase in your credit score! Most installment loans do not have a charge for paying off the loan early, however always read the fine print of your contract, as there are instances where an early payoff fee or penalty is part of the terms and conditions of some loans.
No, a credit card is a revolving line of credit. This differs substantially from an installment loan mostly due to the flexibility of these revolving lines. For example, credit cards have no set repayment schedule whereas an installment loan is based on a fixed timeframe. Additionally, the amount borrowed on a credit card is constantly available depending on the revolving utilization, whereas an installment loan is a fixed amount borrowed. Lastly, credit cards are potentially subject to variable interest rates, and installment loan rates, like their repayment terms and amounts, are fixed.
Yes, an auto loan is an installment loan secured by the value of the automobile you are purchasing.
Absolutely! While there will be a negligible dip in your credit score once you first open the installment loan, the history of consistent, on-time payments will substantially improve one’s credit score.