Searching for smart money management?
You’re not alone. Approximately 24.8 million Americans carry a personal installment loan at present. The numbers keep increasing every year.
Millennials and young professionals are increasingly taking out installment loans to pay for everything from emergencies to consolidation. But there’s a catch…
The majority of people fail to understand what installment loans are all about.
And that’s how they are being misled. Big time.
Let’s get to the good stuff. In this post we will look at what to know before getting an installment loan. These are the most valuable points:
- What Are Installment Loans?
- Why Young Professionals Choose Installment Loans
- How To Qualify For An Installment Loan
- The Real Cost Of Borrowing Money
What Are Installment Loans?
An installment loan is simple.
You get a fixed amount of money and repay the full amount in set monthly payments until the loan is completely repaid. This period can be from 6 months to 7 years depending on the lender and the loan amount.
The monthly payments remain unchanged throughout the repayment term – this makes budgeting a lot easier. Your minimum repayment is consistent, unlike your credit card minimum monthly repayment which varies with your debt balance. Installment loans are popular because they make it easy for users to budget.
Example:
If you require money for car repair and your car repair service costs $800, taking an installment loan allows you to spread the $800 over several months – which makes it easy for you to budget and repay. Millennials and young professionals especially benefit from the fixed payment scheme as they are still at the initial stage of building their financial legacy.
In the major cities, such as Houston, researching installment loans in Houston, Texas will play a significant role in smooth financial emergencies handling. Search for a loan company that will offer you transparent terms and competitive rates.
Why Young Professionals Choose Installment Loans
Did you know that the personal loan balances of Gen Z borrowers increased by 13.4% from 2022 to 2023, which is the fastest growth rate among all the generations?
The primary reason?
Millennials and young professionals face financial challenges that their parents never had to encounter. You are beginning your journey with school loans, you have to cope with high rents and also your emergency funds still to grow.
Installment loans become a savior when you need them the most and to be precise:
- Debt consolidation – you can use the loans to merge all your high-interest credit cards into one low payment.
- Emergency expenses – to cover up your medical bills or car repair without depleting your savings.
- Major purchases – finance your important investment like moving costs or professional courses.
- Credit building – can be utilized to create a positive payment history that will eventually improve your credit score.
There’s more to the story…
Credit cards sometimes trap you into a system of paying minimum payments with interest accumulating each day. With an installment loan, you have a fixed repayment date. You will know when you will be free of debt obligations.
How To Qualify For An Installment Loan
Do you know what lenders are actually looking for?
If you are hoping to get approval for an installment loan from a bank or credit union, it’s not as hard as you might be thinking. Lenders normally look at these few basic factors.
Your credit score will be the first thing they look at. But the good news is that it is not necessary to have the highest credit score. In fact, most lenders will work with borrowers that have fair or even bad credit scores. The only difference is that you will be paying a higher interest rate.
The next thing they will look for is your income verification. This is done to ascertain that you have a steady income source to be able to make the set monthly payments. It doesn’t have to be a full-time job; it could be a part-time source or a 9-to-5 job, even freelance gigs if you can show consistency.
The debt-to-income ratio also counts. The debt to the income ratio is the percentage of your monthly income that is spent on the monthly repayments of your existing debt. Most lenders will want this to be at or below 43%. But don’t worry, some will go beyond that.
One thing people don’t know:
Your employment history will also affect your approval chances. Lenders have this phobia of people who hop from one job to another without staying for at least 6 months. A strong employment history can increase your approval chances.
The Real Cost Of Borrowing Money
Installment loans and the interest attached to them are the actual reasons why you need to know the true cost of borrowing money.
The interest rate you are offered will determine the actual amount of money you will pay by the time the loan is fully repaid. The rates also vary depending on your credit score as well as the lender. The interest rates of most lenders typically range from 6% to 36%.
Here is an example:
If you take a $5,000 loan at an interest rate of 12% for 3 years, you will be required to make payments of about $166 per month. On the entire loan, you will have paid about $976 in interest. Your $5,000 loan will have cost you $5,976 by the time you complete the repayment.
Do you see my point?
Knowing the actual cost of a loan will help you make an informed decision. Also, most lenders will charge you what is known as an origination fee. It is usually between 1% to 8% of the loan amount. This fee will be deducted from your loan amount.
If you take a loan of $5,000, you will have to borrow $5,400 to receive $5,000 from your lender. Ensure you know what you are getting yourself into; some lenders will charge you a prepayment penalty, if you decide to pay off your loan earlier. However, some lenders don’t charge any prepayment penalty. Make sure you compare not less than 3-4 lenders before settling for one.
Making Smart Borrowing Decisions
This is the best-kept secret that most financial advisors will not tell you;
Installment loans are not necessarily good or bad. It is a tool. Just like every other tool, it all depends on how it is being used.
The right time to apply for an installment loan is when you have a repayment plan and the loan has a specific purpose. It is smart to take an installment loan when you need to consolidate your high-interest credit cards. It is not the best when you have a vacation to take.
Millennials and young professionals will need to learn to build a healthy financial habit alongside good borrowing.
- Make sure you have an emergency fund to cover some unexpected expenses. You do not always have to borrow to meet these urgent needs. Start small – even $500 is a good start to protect you from having to take out a loan.
- Ensure you pay more than the set minimum payment when possible. An extra $20 per month can save you months of repayment and hundreds of dollars in interest.
- Do not borrow more than you need to. Just because you qualify for a $10,000 loan, doesn’t mean you have to borrow the entire amount. Borrow just what you need.
Wrapping Things Up
Installment loans are an excellent financial tool when used in the right way.
It’s a good option that will help you, as a young professional, to have a good structure to maintain your debts, your expenses, and build a good credit history. But, the most crucial part is understanding everything before you proceed to sign.
Here are a few key takeaways;
- Shop around and compare at least 3-4 lenders before settling for one
- Know the actual cost of your loan (interest rates inclusive)
- Borrow only what you need and have a specific plan on how to repay
- Look for lenders with no prepayment penalties – this allows you to repay earlier
Take your time, do your research, and then make a decision on the one that best suits your needs.
The financial habits you form today will always affect your financial future.
