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Installment loans allow you to borrow a lump sum of money and repay it over a fixed period of time through equal payments. This can be an affordable way to pay for large planned expenses or consolidate higher interest debts. However, installment loans come with interest and sometimes fees, so they aren't right for everyone's financial situation. Always find out what fees are included with your loan. Ask yourself the following key questions to determine if borrowing an installment loan makes sense for you.
How will you use the funds borrowed?
First decide if an installment loan aligns with your goals. These loans are best suited for planned big-ticket expenses like adoption costs, medical procedures, home renovations, auto repairs, family vacations, and weddings. Debt consolidation to pay off credit card balances with high interest rates is also a smart use of installment loan funds. However, it's generally not wise to borrow for everyday recurring expenses.
How Quickly Can You Repay the Loan?
Installment loans have terms ranging from 6 months up to 7 years. While a lengthier term of 5-7 years lowers the payments, you end up paying far more interest over time. It's wise to only borrow what you can reasonably afford to repay over a 1-5 year period. Establish your budget, factor in existing debts, and determine what payment you can dedicate toward a new loan.
What Is Your Credit Score?
Most installment lenders require good credit—around 680 FICO or higher—to qualify for the largest loans with lowest interest rates and longest terms. If your credit score needs work, focus on improving it first before applying. A lower score can result in denial or higher rates/fees. Researching various lenders will let you see what terms may be available.
Do You Have a Stable Income?
Lenders want to see reliable income that can cover the uniform installment loan payments. Having consistent employment or verifiable non-employment income will provide confidence you can handle the payment obligations without issue. If your income tends to fluctuate, an installment loan may be risky.
At the end of the day, the right financing solution comes down to borrowing only what your budget allows and working to repay the installment loan as fast as you can. This prevents wasted money on interest and keeps your debt load light. If you want to move forward, be sure to compare lender offers. An installment loan can work for you with the right loan terms and repayment discipline.