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Installment loans provide accessible lump-sum financing that borrowers can repay over a set period of time through predictable fixed monthly payments. This type of borrowing can be an effective way to fund major purchases or consolidate debts when used responsibly. However, installment loans also come with drawbacks to weigh. Let’s explore some of the key pros and cons of installment lending.
Pros
- Set fixed payments. Equal bi-weekly or monthly installments with principal and interest make financial planning easy. You'll always know the monthly bill's exact amount over the full loan term.
- Locked-in rates. Installment loans lock in interest rates for the duration of repayment so monthly bills don’t fluctuate, providing reliability.
- Versatile financing. Fund anything from home improvements and medical procedures to debt consolidation, auto repairs, family emergencies, and more.
- Fast funding. Many lenders deposit approved funds within one business day of signing loan agreements. Much faster turnaround than trying to save up cash.
- Improved credit scores. Making consistent on-time installments builds positive payment history and helps improve credit reports and FICO scores over time.
- No early repayment penalties. Paying off installment debt ahead of schedule saves on interest without incurring expensive early repayment fees.
- Fixed timelines. Repayment terms of 12-84 months give borrowers options to choose what works best for their goals and current budget planning needs.
Cons
- Credit checks. Installment loan lenders may perform hard inquiries when borrowers apply, which can temporarily lower credit scores.
- Interest accrues. Interest starts compiling as soon as loan funds disburse, increasing total repayment costs, especially over lengthy terms.
- Lengthy terms. While tempting for lower monthly bills, long 72-84 month repayment terms accrue exorbitant amounts of interest over time.
- Insufficient income. Proof of recurring income is required. Irregular income can make loans riskier for lenders to approve if repayment abilities seem unreliable.
- Missed payments. Just one late installment payment can result in expensive fees and credit damage. Will need to plan for sufficient monthly income to reliably cover recurring bill.
Overall, installment loans make financial sense for those who need temporary access to cash and have the recurring income and sufficient creditworthiness to take on modest loan amounts over shorter 1-5 year terms. Just be cautious in borrowing more than is necessary or affordable.