Advantages and disadvantages of installment loans
Installment loans offer fixed terms. Unlike credit cards, they don’t allow you to borrow repeatedly, but can be prepaid. Here is an overview of their pros and cons.
These loans are ideal for borrowers who want to know exactly how much they will be paying each month. The best installment loans in Texas can help cover a variety of expenses, from buying a car to paying for education. Let’s take a look at the advantages first.
1. Fixed monthly payments
Borrowers know in advance how much to pay monthly. This makes financial planning easier. You can borrow to make a big purchase, like a house or vehicle, and make small payments that cover both principal and interest. For many people, installment loans are the only option because they don’t have enough cash on hand.
Each payment reduces your debt amount and the loan balance reaches zero at the end of the term. You know exactly how many months the term covers and how the repayment works because lenders provide amortization tables. Each payment is broken down, so you can see how the interest share is gradually going down.
2. Early repayment
Although the deadline is fixed, you have the ability to pay off your debt faster. This is the most preferable scenario because you will end up paying less interest. The only downside is that unlike a credit card, this system requires you to contact your lender whenever you want to make a large payment. Otherwise, they will still charge the standard amount. Generally, there is no penalty for prepayment.
These loans do not allow you to continue borrowing, which sets them apart from lines of credit. On the one hand, it prevents borrowers from taking on more debt. On the other hand, you may still need to access additional funds in emergency situations. With a credit card or line of credit, you can borrow money multiple times.
Disadvantage: Possible fees
Some lenders will also charge special fees. Home loans can include closing costs, while the origination costs for a personal loan can add between 1% and 8% of the amount borrowed. The most expensive form is the payday loan. Interest can reach 400% over a 12 month period.
Why you should be careful
Despite the convenience, installment loans are obligations that must be met. Non-payment can lead to serious consequences. Even borrowers who anticipate and budget carefully are not protected against force majeure.
Those who default on their loans can lose their collateral, and they are sure to see their credit rating go down. This may make them unable to take out more loans because they are no longer entitled to them. Avoid maximizing your debt-to-income ratio. Installment loans are convenient, but they’re not as flexible as credit cards or other lines of credit.