Installment loans–the category that personal loans fall into–require monthly principal and interest payments. Since the borrowed amount is determined up-front, monthly payments are predictable and consistent. This ensures the entire principal balance has been paid back in full by the end of the loan term.
Before taking out an installment loan, it’s important to know the disadvantages and advantages associated with this option. We’ll highlight the key qualities that make up an installment loan to ensure you can feel 100% confident in your decision.
What are the advantages of installment debt?
One of the main reasons borrowers opt for an installment loan over a revolving loan is that it encourages financial management and cuts down on stress. Smaller, manageable payments made over a long period of time give you a chance to plan your budget accordingly. And since you risk facing a ding to your credit score if you default on a payment, you have much more of an incentive to make sure you make those monthly payments.
Since you’re making smaller payments, you’re also not having to scramble the day before your payment to scrounge up the necessary money (like you might with a Payday loan). And with fixed interest rates for the life of the loan, you know what to expect.
Installment loans are a great option if you’re looking for fast funding. With Helix, we can process your application within a couple of days and have money in your bank within hours if you’re approved. Even better, we take into account other factors besides your credit score when processing your application. So even if you have a less-than-ideal credit score, you could still qualify for a personal loan.
What is Fast Funding? If you need cash fast and don’t want to go through the long process associated with revolving credit options (like credit cards), you can get fast funding for an installment loan.
Can an installment loan help with my credit?
Yes! When used correctly, an installment loan can help establish your reliability as a borrower and diversify your portfolio. Of course, this all relies on you making your payments for the full amount required under the loan terms and on time.
One of the factors that’s taken into account when determining a credit score is ‘credit mix’, which is the variety of loans that appear in your credit report. So if you already have a credit card (revolving debt), an installment loan might be the perfect way to diversity your loans. While some companies might weigh this less heavily than others, this is generally considered to be good practice.
Credit utilization ratio
Finally, installment loans can improve your credit score if you already have credit cards with a high level of credit utilization. In fact, this is one of the most significant ways you can impact your credit score. Your credit utilization rate is the percentage of your borrowing limit represented by your outstanding credit card balances. This factor makes up about 30% of your FICO score. Your utilization rate can get very high when you’re getting close to maxing out your credit cards, which often results in a lowered credit score.
Debt consolidation loans and credit builders
Though these may sound like some pretty convincing reasons to take out an installment loan, you should be aware of the drawbacks as well.
You’re in it for the long haul
Installment loans are tailored more towards individuals who need smaller monthly payments than those who really want to get out of debt in the short term. Since these loans are typically long term, you could spend several months paying off your loan (though you always have the option to make larger payments than the minimum). With Helix, you can expect to have no early repayment fees, which, when paired with the opportunity to lower your interest payments makes it particularly enticing to pay off your loan early
Fixed interest rates
Because interest rates are fixed with an installment loan (vs. variable), they are typically higher than their counterpart. Fixed interest rates are not responsive to the market, so they could remain high even with a decrease in the market rate.
Limited flexibility once signed
An installment loan has unforgivable conditions, which means terms established prior to closing cannot be changed during the life of the loan. Even if your situation changes, you’re still committed to the installment loan you closed on and its terms (interest rate, schedule, etc.). If you have a secured installment loan that you default on, you could lose a valuable asset to cover the loan in one payment (ie: mortgage payment–your home equity).
Note: Our personal loans are unsecured, so your assets cannot be taken from you in the case of a default.
Penalties for early payments
You may notice at the beginning of your loan term that only a portion of your payment is actually going toward the principal, but keep in mind that installment loan rates are still better than lines of credit. And if you decide to make additional principal payments toward your loan, you may incur interest penalties with the lender. On the other hand, you can pay off the entire loan balance at any time with a line of credit.
Note: At Helix, we never charge penalties for early payments.
So, Should I Pay Off My Installment Loan Early?
Many experts believe that paying off an installment loan early won’t actually help your credit score, though it does ensure that your score isn’t negatively affected by defaults. Especially for those who are only a few months into their installment loan, it could have no impact at all.
With or without impact on your overall credit score, paying off a loan early most certainly has an impact on your wallet. Paying off an installment loan early means that you will pay less interest because you drastically reduced the amount of time you held the loan. And with no early pay-off fees, there is no reason why you shouldn’t.
Apply for a Personal Installment Loan
Whether you’re looking for an installment loan for bad credit or just a little something to cover an emergency, you can apply for a personal loan online in a matter of minutes with Helix. Installment loans online make it easy to apply, get approved, and have money in the bank within a couple of days. As an installment loan direct lender, we can provide up to $4,000 in funds to your account to pay off anything from a home remodel to a medical emergency.