Installment loans are not difficult to understand, a brief introduction is enough to clear your concept about it. It is the easiest and trouble-free form of money borrowing, yet to be paid where you return a debt in regular intervals or parts (installments), e.g. monthly, bi-monthly, quarterly or annually. In general terms, the latter refers to both personal and commercial loans which have to be paid with a regular schedule known as an installment loan. Installment loans are used to consolidate either;
- Finance a big purchase
- Finance a wedding
- Renovation of house
- Health emergency
- Build or improve credit score
- Purchase of house or car, etc
Types of installment loans
By giving a closer look at the functioning of these installment loans, we have scrutinized different types of installment loans, to help the individuals solely looking for financial aid. There are three main types of installment loans
- Mortgages: Mortgages are the most popular and common type of long termed installment loan. Mortgages are used for property dealing. Mortgages are of an amount ranging from $100,000 and above. The period can go from 20 to 40 years because of the added interests. Usually, before someone can opt for a mortgage, a deposit of about 5-20 % of the total mortgage amount is required. The borrower’s financial background and credit score are reviewed by the lender to determine the interest rate on the mortgage.
- Personal loan: These loans are taken by the individuals seeking to consolidate outstanding loans. These loans are taken out for any personal purpose or need. Personal loans are easier to obtain, as they do not require hard and fast credit checks.
- Auto loan: In order to finance the purchase of an old or brand new car/ vehicle, auto loans can be taken. Auto loans can be paid in intervals over the course of years. Lenders give you auto loans after authenticating your credit score from your bank. The latter, are protected with collaterals. The collateral loan will give you a guarantee that a physical asset can be occupied by the lender in case of the borrower’s inability to repay on time. The terms length for such loans can vary between 24-48 months and can go outlying ranging from 72-84 months. Long termed installment plans lower monthly payments, having a great add-on interest rate. Vehicles value get lost with the time period and as a result, consumers have to pay a 30-40% higher amount over the actual car cost. This is also known as upside-down debt.
The relationship between different types of installment loans (mortgages VS personal loans)
The relationship between installment loans and mortgages are just like rectangles and squares. Both have four lines connecting to each other, all squares are rectangles but all rectangles are not squares. Same is the matter with different types of installment loans and mortgages. The main difference between mortgages and personal loans is that personal loans are unsecured whereas mortgages are secured loans.
|Personal loans can be taken without any credit score||Mortgage loans require inspections regarding the borrower’s payability and credit score, etc|
|It is for much smaller amounts, and it is much suited for individual’s miscellaneous needs (furniture, finance wedding, medical aid, student consolidation, etc)||Mortgages are specially designed to purchase of property (house, shop, field, etc)|
|Interest rates vary from 3% to 36%||Interest rates vary according to the lender’s demand|
|Maximum loan amount goes up to your payback ability||Usually, have high-cost area limits|
|Its duration typically lasts up to 1-7 years||Its duration lasts more than personal loans, usually up to 15-30 years|
Related: When is the best time to buy or sell a home?
Pros of Personal loans
- No income tax is charged
- Many lenders do not require you to provide cash upfront as a down payment.
- There is a chance to negotiate your payment in case of a financial calamity
Cons of Personal loans
- They have short repayment terms
- They have high-interest rates because of no collateral provision from the borrower
- The loan amount is smaller.
Pros of Mortgages
- Mortgages are secured with the property, so the A.P.R (annual percentage rate) is relatively less than other types of installment loans
- Borrowers get clear prequalification of what they are going to get
- The interest rate on yearly property taxes can be deducted by the borrower.
Cons of Mortgages
- There is always a risk of foreclosures on mortgages as if you cannot pay back the debt, your collateral will be confiscated by the lender
- Although the amount of interest is relatively low, mortgages have a high debt amount that can change drastically according to the market value of a property.
Which option is best to choose??
In the end, we just have to say that if you want to make a purchase of a real estate or property, you should go for mortgages, but if you want to finance your personal needs, personal loans are a good choice. Choosing an option entirely depends on your needs. So it’s better to look at your need at first and then make a perfect selection.