Personal installment loans allow borrowers to get a lump sum of cash upfront and repay it over fixed intervals with interest. They provide an accessible way to get financing for major expenses or consolidate debt when you need funds quickly. However, like any loan, they also come with obligations and costs.

In this comprehensive guide, we’ll explain everything you need to know about personal installment loans.

What Are Personal Installment Loans?

A personal installment loan is an unsecured loan that you repay in equal monthly installments over a set repayment term. The term can range from a few months to several years, with repayment terms of 12, 24, 36, 48, or 60 months being common.

Unlike revolving credit like credit cards where your balance can fluctuate, installment loans have fixed monthly principal and interest payments. Each payment goes towards both reducing the loan principal and paying interest. This structure helps you pay off the loan in full by the final payment date.

Installment loans can be used for almost any personal purpose such as:

  • Consolidating high-interest credit card balances
  • Financing a major purchase
  • Paying for medical expenses
  • Funding home improvements
  • Covering a wedding or other event
  • Paying taxes

They provide access to lump sum financing that may be needed urgently. The process is often faster than applying for a traditional bank loan.

However, you borrow the full amount upfront and commit to the repayment schedule. So it’s critical to only borrow what you can realistically pay back based on your budget.

How Do Personal Installment Loans Work?

Here is an overview of how personal installment loans work:

  1. Request a Loan and Get Approved – You fill out a loan request with details on income, employment, and credit history. The lender reviews it to decide if you qualify and at what rates/terms.
  2. Accept Loan Terms – If approved, you get a loan offer outlining the interest rate, fees, repayment timeline, etc. You sign to accept the terms and get funded.
  3. Receive Funds – The approved loan amount is distributed to you as a lump sum, either directly to your bank account, on a prepaid card, or by check.
  4. Make Payments – You pay back a fixed installment each month comprising principal and interest until the loan is fully repaid by the final payment date.
  5. Pay Off Loan – When you make the final payment, the loan is paid in full. You get a paid-in-full notice for your records.

If you ever have trouble making payments, it’s important to communicate with the lender early to discuss options like rescheduling payments to avoid defaulting on the loan.

What Are the Main Advantages and Disadvantages?

Installment loans offer both pros and cons to weigh:

Advantages

  • Predictable payments – You know how much is due each month.
  • Fixed payoff date – There’s a set end date for repayment unlike credit cards.
  • May get funds quickly – Often faster than traditional bank loans requiring extensive approval.
  • Can improve credit – Making on-time payments helps build your credit score.
  • Single monthly payment – Consolidates multiple debts into one installment.

Disadvantages

  • Accrues interest – You pay interest costs on the borrowed amount.
  • Inflexible terms – The repayment schedule can’t be altered easily.
  • Fees may apply – Some lenders charge origination fees.
  • Missed payment penalties – Late fees if you miss the due date.
  • Poor credit has higher rates – Those with lower scores get charged more interest.

Evaluate both sides to decide if the pros outweigh the cons for your situation. An installment loan makes the most sense for a major, planned expense you can budget for.

What Credit Score Do You Need to Qualify?

Your credit score is a key factor determining installment loan approval and interest rates. Each lender sets their own minimum score requirement which typically ranges from:

  • Excellent Credit – 740+ – Qualifies for the best rates
  • Good Credit – 670-739 – Approval at average rates
  • Fair Credit – 580-669 – May be approved at higher than average rates
  • Poor Credit – 500-579 – Low chance of approval, or very high rates

In general, you need at least a fair credit score between 580-650 to potentially get approved. But shooting for good or excellent credit in the 670+ range will ensure you get competitive rates and terms.

Here are tips for boosting your credit score before requesting a loan:

  • Pay all current bills on time each month
  • Lower credit utilization by paying balances down
  • Check reports for errors or outdated info to dispute
  • Avoid new credit inquiries by only requesting when needed

With good credit habits, you may be able to improve your score enough over a few months to reach better loan terms.

What Factors Determine Your Interest Rates and Fees?

Lenders take a range of factors into account when determining installment loan interest rates and fees including:

  • Credit Score – The higher your score, the lower rates you’ll qualify for. Excellent credit means prime rates.
  • Income – Your income needs to be adequate to make payments comfortably. Higher incomes may get better rates.
  • Loan Term Length – Longer terms like 60 months have higher interest than shorter 12 month loans.
  • Origination Fees – Some lenders charge upfront fees at closing which affects APR.
  • Lender – Each lender has their own criteria that determines rates offered. Shopping around helps find the best.
  • Loan Purpose – How you plan to use the funds may impact interest rates. For example, debt consolidation loans sometimes have lower promotional rates.
  • Collateral – For secured installment loans, pledging an asset like a car title can lower rates.

Be sure to compare multiple lender rate quotes side-by-side accounting for these aspects. Loan calculators on lender websites can help estimate potential rates tailored to your situation.

How Much Can You Borrow?

Loan amounts are based on income, creditworthiness, debt-to-income ratio, and other factors. While amounts can range widely, here are some general guidelines on installment loan amounts to expect by credit tier:

  • Excellent Credit – Can qualify for up to $35,000 or more in some cases.
  • Good Credit – May be approved for around $15,000 to $25,000.
  • Fair Credit – Can possibly borrow $1,000 up to $15,000 depending on lender thresholds.
  • Poor Credit – Most lenders will cap at lower amounts around $1,000 for those with challenges.

Those with great credit have more options for sizable loans from multiple lenders while poor scores limit approval chances and loan amounts.

Lenders want to confirm your income is adequate to manage repayments on the loan amount comfortably. DTI ratios upwards of 40-50% may decrease approval odds and loan sizes.

The Loan Request Process Step-By-Step

Requesting an installment loan includes a few simple steps:

  1. Prequalify Online – Visiting lender websites lets you check rates without a hard credit pull. This gives you an idea of what you may qualify for before formally submitting a loan request.
  2. Submit Loan Request – You’ll provide personal information like employment status, income, Social Security Number, and consent to the credit check required for underwriting.
  3. Lender Underwrites – They’ll pull your credit reports from the bureaus and verify the details you provided to decide approval.
  4. Get Approved – If approved, you receive a loan offer outlining the exact loan amount, interest rate, fees, and repayment terms for your consent.
  5. Accept and Sign Agreement – Review all terms carefully before signing the agreement to activate the loan. This legally binds you to repay the loan per the agreement.
  6. Lender Funds Loan – The lender distributes the loan funds to you either electronically to your bank account or via check based on the chosen disbursement method.
  7. Begin Repaying – Your monthly installment payments start as scheduled following receipt of funds and continue until the loan is fully repaid.

Be sure to provide accurate details on your loan request and review the agreement thoroughly before signing to ensure you understand your legal obligations for repayment.

Tips for Getting Approved

To boost your chances of installment loan approval, you can:

  • Maintain good credit by always paying bills on time.
  • Pay down credit card and revolving balances to lower your utilization ratio.
  • Avoid initiating new credit inquiries prior to submitting your loan request.
  • Verify accurate personal details like income, employment, and contact info.
  • Provide all requested documents promptly for efficient underwriting.
  • Consider adding a cosigner with good credit to strengthen the request.
  • Ask about secured loan options using collateral if your credit needs improvement.
  • Contact lenders to check if you prequalify so you can compare options.

With many lender options, it helps to know the most important factors to compare to find the most competitive loan provider:

  • Interest Rates – Compare rate quotes from different lenders.
  • Fees – Consider origination, prepayment, and late fees.
  • Loan Amounts – Lenders offer different maximum amounts.
  • Loan Term Options – Look for a variety of terms and flexibility.
  • Early Repayment – Check if prepayment penalties apply.
  • Customer Service – Reviews can reveal how responsive and helpful a lender is.
  • Funding Time – Understand how quickly funds are disbursed after approval.
  • Credit Score Requirements – Know the minimum score needed for approval.
  • Cosigner Option – Find out if a cosigner is allowed to improve your request.
  • Ease of Request Process – A user-friendly online process can make a big difference.

Researching lenders thoroughly on these aspects makes it easier to compare tailored rates and terms.

Key Questions to Ask Before Requesting a Loan

Before submitting a loan request, make sure you get answers to these key questions from potential lenders:

  • What loan amounts and terms do I qualify for based on my credit score?
  • What will my interest rate and monthly payment be?
  • Are there any fees like origination fees or prepayment penalties?
  • How quickly can I get funded once approved?
  • What happens if I’m late making a payment?
  • Can I pay off my loan early, and are there fees if I do?
  • Do you report loan payment history to credit bureaus?
  • What are my options if I have trouble making payments?
  • Do you have reviews from past customers I can read?

Getting clear information on these aspects ahead of time ensures you understand all the details of the loan offer and helps you pick the lender providing the best overall terms and borrowing experience.

Choosing the Right Loan Amount

Determining how much to borrow with an installment loan depends on a few considerations:

  • Affordability – Ensure the monthly payment fits comfortably in your budget without stretching your finances too thin.
  • Interest Costs – Bigger loans mean you pay more in interest, so borrow only what you need.
  • Credit Impact – A larger loan can affect your credit utilization ratio.
  • Loan Purpose – Borrow enough to cover your need, whether it’s a car repair or a medical bill, without excess.
  • Emergency Savings – Avoid using funds set aside for emergencies to repay the loan.
  • Home Budget – Consider whether cutting back on discretionary spending will help afford the monthly installment.
  • Payoff Goal – Ensure you’re motivated to pay off the full balance and close the loan without dragging it out.

Conservative borrowing ensures you get the funds you need without taking on too much debt. You can always make extra payments each month to pay off the loan faster.

Tips for Managing Your Loan Repayment

Here are some tips to help you manage loan repayment:

  • Autopay – Set up automated payments from your checking account to avoid missed payments.
  • Payment Reminders – Use calendar alerts for upcoming due dates.
  • Pay Biweekly – Making half payments every other week can save on interest.
  • Renegotiate Terms – If needed, ask the lender about extending the repayment term.
  • Pay Extra – Making additional principal payments reduces overall interest costs.
  • Round Up Payments – Rounding up your monthly payments can help reduce principal faster.
  • Review Statements – Regularly check your statements to ensure payments are applied correctly.
  • Avoid Cash Advances – Steer clear of cash advances, which often incur higher fees and rates.
  • Talk to Your Lender – Communicate early if you anticipate any challenges in making payments.

Proactive payment management can help you avoid late fees and keep your repayment schedule on track.

Key Takeaways

  • Personal installment loans offer fixed regular payments unlike revolving credit cards, allowing you to pay off a lump sum over predictable intervals.
  • Interest rates vary based on your credit score and history; excellent credit can secure the most competitive rates.
  • Loan amounts depend on income, existing debt levels, and creditworthiness, with lower scores often limiting both approval chances and loan sizes.
  • Review all terms carefully before accepting a loan offer and ensure that monthly payments fit comfortably within your budget.
  • Ask lenders questions upfront to understand all costs, obligations, and options before committing to a loan.
  • Setting up autopay and reminders, and paying extra when possible, can help reduce interest and accelerate repayment.

FAQs

How quick is the loan request process?

Many lenders provide prequalification online instantly. Once you provide all required documents and details, approval can take anywhere from 1-7 days before funds are disbursed.

Where does the money come from?

Lenders provide the loan capital from their available cash reserves. Some lenders may sell loans to investors afterward, but you repay the lender directly.

What if I have bad credit or a past bankruptcy?

You may still get approved, though likely at higher interest rates and for smaller loan amounts compared to applicants with better credit. Each lender has different eligibility policies.

Can I get a loan without proof of income?

Most lenders require income verification through pay stubs, tax returns, or bank statements. However, some options like secured loans or loans based on other factors may be available.

How are installment loans different from payday loans?

Installment loans allow you to repay the borrowed amount over months or years, while payday loans require repayment in a lump sum by your next paycheck in 1-2 weeks. Installment loans also generally have lower interest rates than short-term payday loans.

Final Tips

  • Shop around for rates from multiple lenders, including banks, credit unions, and online lenders.
  • Be cautious of offers promising guaranteed approval, as these may have hidden costs or unfavorable terms.
  • Borrow for needs rather than wants, and only take on debt that you can comfortably repay.
  • Pay down balances quickly to reduce overall interest expenses.
  • Always make at least the minimum monthly payment on time.
  • Build an emergency savings fund so you aren’t forced to rely on additional debt for unexpected expenses.

With the right planning and discipline, personal installment loans can provide convenient access to the funds you need—repayable over time. Just be sure to compare all options thoroughly and borrow only what your budget allows.

Samuel Mitchell