Back to resources
Installment loans allow borrowers to finance large expenses through predictable fixed payments over a set repayment term. But how do you know if taking out an installment loan is the right financial decision for your situation? Consider the following:
Examine Your Budget First
Determine what payment fits comfortably in your budget before applying for any loan product and never borrow more than you can realistically repay each month. Take an honest look at your income, expenses, and any existing debt payments. An installment loan with inflexible monthly payments may not work for those with very tight budgets or inconsistent income streams.
Consider Total Interest Costs
While locked-in payments of an installment loan make repayment easier to plan out in advance, interest still accrues on the full term, so longer loans can drive total costs way up. Only borrow what you need for as short of a term length as possible to save substantially on interest expenses. Avoid terms that exceed 60 months. Choose a lender that has no prepayment penalties. No prepayment penalties allow you to make a larger payment when you can, without any disadvantage. In fact, you pay in full sooner than scheduled and save money!
Compare to Other Types of Loans
Installment loans aren’t always the cheapest type of financing available depending on how the funds are used. For lower interest rates, look into secured loan products like auto loans, home equity loans, and HELOCs for projects associated with those assets. Always shop rates.
Understand the Application Commitment
Find out if the lender uses a credit check to approve your loan...if not, it’s an easier step. While some prequalification applications only result in a soft credit pull, completing the full application authorizes a hard credit inquiry. This can temporarily lower your credit score. If your lender requires a credit report, don’t apply unless you’re serious about borrowing.
Assess Your Credit Situation First
Most installment lenders will require good to excellent credit scores for approval on the best rates and longest repayment terms. If your credit profile is in need of repair, focus on repaying existing loans timely. Preapprovals will also confirm if your credit situation is favorable.
Have a Repayment Plan in Mind
Never borrow without a well thought out plan to repay the loan in full by the final payment date. Will you need to find ways to save on monthly expenditures or do you have new earnings or bonuses coming up? Map out exactly how each payment will be covered throughout the term—and prepare backup plans for unforeseen life events.
Overall, installment loans make most sense for those with recurring income to cover fixed payments and the discipline to pay off the loan in full based on a set schedule. Borrow conservatively based on true need and what your unique financial situation will reliably support in loan payments each month.