Installment Loan: Your Saving Grace in Financial Crisis
In Abraham Maslow’s hierarchy of needs, one of the basic needs he emphasized is security. This includes financial security which encompasses and provides for physiological needs such as clothing, food, shelter, and warmth. Financial security equates to financial stability.
However, unavoidable situations arise and may bring an imbalance to financial stability. Such situations could be a delay in salary, emergency funding for a health problem, or the need for a new house. These situations prompt the need for financial assistance.
Financial crises happen. For instance, you have a new job that pays well, but the distance from your home to the workplace needs transportation. You decide to buy a car, but you don’t have the financial capability to own one. This is where installment loans come in.
Installment loans are financial terms where a person borrows a specific amount of money which is then repaid through a series of fixed payments called installments with additional interests. Depending upon the agreement of the borrower and the lender, payments are usually made monthly or weekly. Sometimes, a borrower may opt for bi-weekly installments.
Such loans are mostly made to cover expenses ranged from medium to high. Buying a new house or a new car are some of the purposes of loaning. Due to such expenses, having installments that fit in with the specified salary makes it easier to pay.
How does it work?
Applications for installment loans must first be filled out. These applications commonly specify the purpose of the loan. Examples of purposes would be purchasing a car and buying a house. Various options are discussed by the lender and the borrower. Commonly discussed are varied options regarding issues like the term of the loan, the payment amounts, the payment schedule, and, most importantly, the down payment.
Application processing fees, the origin of loan fees, and extra charges that may come with the loan such as late payment fees are just some of the additional fees that borrowers may have to pay.
To lessen and save interest charges, borrowers may pay off the loan before the end of the agreed term set in the loan agreement. As a result, the borrower will retire the loan after passing the required payments.
Examples of Installment Loans
Installment loans may be confusing to other people as it is unfamiliar. However, installment loans are the types of loans most people choose. CreditNinja loans emphasize three common types of such loans.
1. Car Loans. This type of loan follows most of the same procedures and rules that are applied to other loans. A borrower, in most cases when he/she purchases a car, will specifically take a loan for a car. However, some borrowers use a personal loan to substitute car loans.
Such loans are specified to be paid in lengths of time. Generally, the lender and the borrower agree a specific time between 24-60 months. Some agreements may exceed more than that. This type of loan is also called as “financing” as it includes a variety of taxes and fees which are then added to the total loan amount.
2. Mortgages - Mortgage, or also known as a lien against property or claim on property, is a debut instrument which is secured by the collateral of specified properties in real estate. This is what the borrower must pay back with a certain set of payments.
The use of mortgages entails the purchase of large real estates by individuals or companies without paying the whole price upfront. Mortgages usually take up to years for borrowers to repay the loan with a certain amount of interest until the borrower owns the property clear and free.
There are two general types of mortgages — the fixed-rate mortgage and the adjustable-rate mortgage (ARM). Loaning using the fixed-rate mortgage, the borrower must pay the constant interest rate for the entire duration of the loan. The monthly principal and payment in interest never change from the very first mortgage payment to the last mortgage payment. On the other hand, in an adjustable-rate mortgage, the rate of interest is fixed for an initial term then becomes inconsistent with rates in market interests.
3. Personal Loans - This type of loan is basically made for personal use. Such loans are used for home renovations, vacations, weddings, funeral costs, or unexpected events. There are two types of personal loans. These are secured loans and unsecured loans.
For secured loans, the borrower gives, in turn, a personal asset as security on the debt. Typical assets or collateral are home or car. If the borrower fails to pay the loan with the interest, the lender can own the asset and sells the asset in order to bring back the money lent.
In unsecured loans, money is lent without any personal asset or collateral asked. Unsecured loans are commonly given to borrowers with high credit scores and the amount borrowed is not too high. So, if the borrower is deemed to have no credit scores, it may be hard for the borrower to get an unsecured personal loan.
Loaning isn’t always a bad idea. Whether it’s a house or car, it is better to invest in something that helps in the betterment of one’s lifestyle. As long as you are smart in loaning and you know the consequences, loaning becomes an advantage rather than a disadvantage in making your future brighter.
Tiffany Wagner is currently taking a degree in Investment Management Analysis in her junior year in college. In the context of decision making and business strategy, she focuses on finance and information interpretation.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.