Common Myths About Installment Loans Debunked
Debt is a way of life for most adults, but too much debt can be debilitating. Educating yourself on the debt facts and the myths can help you make sound financial decisions. Having a basic understanding of personal installment loan debt facts is a great start. We’ve compiled some of the most common myths about this form of debt to get them straightened out.
1. You’ll Pay More in Interest
Installment loans are a powerful personal finance tool that can help you fund a big purchase with manageable payments over a specific loan term. But like any type of debt, they come with pros and cons. It’s important to understand these facts before applying for an installment loan to make informed financial decisions.
One of the biggest concerns associated with installment loans is that they can lead to costly interest charges if you fail to make timely payments. These charges can also add up if you extend the loan term past your original repayment plan. To avoid paying more interest, it’s essential to always pay your installment loan on time and keep your credit utilization low.
However, it’s possible to save money on interest by choosing a lender that offers competitive terms and conditions. For example, some online lenders may offer lower APRs for borrowers with less-than-perfect credit. You can also improve your chances of receiving a favorable APR by taking steps to raise your credit score before applying for an installment loan. This can include making on-time payments and disputing errors on your credit report.
Another major concern is that installment loans can hurt your credit, but the extent to which they do depends on how you manage them. For example, using an installment loan to finance a large purchase and make timely payments can boost your credit score by adding positive payment history to your report and expanding your credit mix. However, if you miss payments or default on the loan, it can significantly damage your credit and make it difficult for you to qualify for future borrowing opportunities.
The good news is that most installment loan lenders do not have credit score minimums and will consider a borrower’s entire profile when assessing eligibility. This includes factors such as bank account activity, employment, education, and existing debts. Some lenders even offer installment loans for people with thin or imperfect credit profiles. For instance, credit unions and online lenders typically work with borrowers with FICO scores as low as 630.
2. You’ll Be Scammed
The Loch Ness monster, George Washington having wooden teeth and cracking your knuckles causing arthritis are just some of the many myths that have become widely accepted despite being unfounded. Myths about credit, loans, and debt are also common. They can be harmful and even deter people from borrowing when they need it most.
Examples of installment loans include personal loans, auto loans, mortgages, and home equity lines of credit. They’re closed-ended debt products that work differently than revolving credit like credit cards. Borrowers receive a lump sum of money when they apply and pay it back in monthly payments with an agreed-upon loan term, usually with a fixed interest rate.
Banks, credit unions, and online lenders may offer installment loans. A person’s credit profile, employment and income, and debt-to-income ratio play a role in a lender’s willingness to extend an installment loan. A lender should disclose the annual percentage rate (APR) on a loan and be transparent about fees. If a lender claims that their rates are “the best” or “guaranteed,” be wary. These types of claims could be a sign of a scam.
In addition to the APR, borrowers should consider the terms and conditions of an installment loan, including their repayment schedule and whether they can afford the loan’s monthly payments. Some installment loans, such as payday loans, have sky-high interest rates and fees that can trap consumers in a cycle of debt. It’s best to avoid these types of loans and seek alternative borrowing options if possible.
It’s important to remember that credit is a finite resource, and you’ll have to repay your loan in full. Your credit score will take a hit if you don’t make your loan payments on time. On-time loan payments, however, can improve your credit scores over time.
3. You’ll Be Scammed by the Lender
Installment loans typically come with a fixed monthly payment and have a set number of months for repayment, which helps consumers create and stick to a budget. The loan balance is gradually reduced with each monthly payment, and the debt is completely paid off by the end of the term. However, credit cards and other forms of revolving credit are not structured the same way and allow you to borrow again and again.
Revolving credit can be helpful if you have a sudden unexpected expense, but it is not appropriate for long-term financing. If you are unable to pay back your debt, you will continue to accrue interest and risk damaging your credit score and potentially losing the collateral attached to your loan.
Understanding the differences between revolving and installment credit is important before deciding which type of debt will be best for your needs. Installment loans are ideal for large expenditures that require time to repay, like home renovations or a car. However, a line of credit may be more appropriate if you’re struggling to make payments or have an emergency expense.
The good news is that you can find a lender offering affordable, flexible installment loan terms. It’s worth taking the time to shop around and pre-qualify for a few lenders before making your final decision. By improving your credit score and lowering your credit utilization rate before applying, you could save yourself a significant amount of money on the life of your loan.
Various lenders offer personal installment loans, including banks and credit unions, mortgage brokers, credit unions, and online lenders. While some lenders may charge higher fees or interest rates for bad-credit borrowers, you can find a lender that offers competitive terms and will work with you to help you reach your borrowing goals. A reputable, licensed lender will never try to scam you or take advantage of your financial situation. Be vigilant and always look for red flags, such as high-interest rates or hidden fees, before signing up for a loan.
4. You’ll Be Scammed by the Bank
Debt is a part of life for most Americans. However, too much debt can be a burden, and it’s important to understand how to manage it responsibly. It’s also important to debunk myths about credit, which can prevent people from achieving their financial goals. Myths like the Loch Ness monster and cracking your knuckles cause arthritis are popular, but they don’t have any basis, in fact. The same is true for many of the myths about installment loans.
Taking out an installment loan isn’t necessarily a bad idea, but it’s important to research lenders thoroughly before applying for one. The best way to find a reputable lender is by shopping around and pre-qualifying with multiple lenders before committing. This can be done without impacting your credit score. Many legitimate lenders offer different terms for their personal loans, so it’s worth the time to compare rates and other features of a loan before selecting one.
In most cases, a borrower’s credit score will determine the interest rate they’ll be offered on an installment loan. To improve your credit score before applying, make on-time payments on all your debt accounts and lower your credit utilization.
Installment loans are available from a wide range of lenders, including banks, online lenders, credit unions, and peer-to-peer lending platforms. Borrowers in good credit health should look to banks for the best rates, while those with less-than-ideal credit may have better luck with lenders who specialize in fair credit loans.
Some types of installment loans, such as payday loans, can carry high-interest rates that are difficult for borrowers to afford. Avoiding these types of lenders is important, as they can lead to a vicious cycle of debt and hardship. In addition, borrowers should be wary of any lender that requires them to send money via prepaid debit card or wire transfer before approving a loan application. This type of scam is very common and could be a sign that you’re working with a shady lender.
With a solid foundation in technology, backed by a BIT degree, Lucas Noah has carved a niche for himself in the world of content creation and digital storytelling. Currently lending his expertise to Creative Outrank LLC and Oceana Express LLC, Lucas has become a... Read more