What is an Installment Loan and How Does It Work
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If you’re reading this, then odds are, you might be considering a loan. Well, figuring out what kind of loan you really want is a great first step.
After all, you wouldn’t try to fly a plane without reading the manual beforehand—and also taking a few classes. And doing a simulator. And getting a license . . . Flying a plane must be hard.
But with Marcus, getting an installment loan doesn't have to be.
What is an Installment Loan?
It’s called an installment loan because you pay back the loan principal and interest in monthly installments, thus “installment loan.”
The borrower repays the loan over a mutually agreed-upon amount of time with a specific set number of scheduled payments.
Simple as that.
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Types of Installment Loans:
- Personal loans – personal loans are often used to pay off and consolidate debt. Marcus personal loans can be used for credit card consolidation, paying off a home improvement project, a wedding and more. Personal loans are installment loans because they are paid off in monthly installments covering the principal and interest of the loan. Most personal loans are unsecured loans, which means that they aren’t supported by any type of collateral.
- Mortgages – a mortgage is a loan used to buy property, usually a house. Mortgages are also paid in installments, typically paid monthly over 15 or 30 year terms, making them long-term installment loans. One of the main differences between a mortgage and a personal loan is that a mortgage can be used for only one thing . . . property. A mortgage is a secured loan and the collateral is the property. If you do not pay back the mortgage, your mortgage issuer could foreclose on your house.
- Auto loans – auto loans are used to buy a car. They are also installment loans in that monthly payments are paid for the loan until the car has been paid off. Auto loans, like mortgages, are secured loans and the collateral is the car. If you are not able to pay off your auto loan, then the loan issuer could repossess your car.
How to qualify for an Installment Loan?
Most lenders are looking at a few key things when you’re looking to qualify for an installment loan. One of the main factors will be your credit score. Your credit score will help determine not only if you qualify for a loan but also the rate, or APR, on that loan. In general, if you have good or excellent credit, you’ll be able to receive lower interest rates as opposed to someone with a lower credit score. If you are applying for a secured loan, the lender may also look at what you can pledge as collateral. Additionally, a lender will most likely review your income and living expenses to assess your ability to pay back your loan.
Do Installment Loans affect your credit score?
When you apply for an installment loan, there are two types of inquiries into your credit report, a hard inquiry and a soft inquiry. For Marcus, receiving loan options will not appear on your credit report and do not impact your credit score because this is a soft inquiry. After you’ve selected your loan option, a hard inquiry occurs to check your credit for the loan. This type of inquiry appears on your credit report and can affect your credit score.
Learn more about what affects your credit score.
Pros and cons of Installment Loans
Pros:
- Installment loans often have a fixed interest rate with equal payments, making them very predictable.
- Predictability means you can budget for how much your monthly installment loan bill will cost.
- With installment loans you know when it will be paid off, as long as you keep paying your bills on time and in full.
Cons:
- Your installment loan is for a fixed amount of money. if you end up needing a little more, you’ll have to apply for another loan.
- APR is often tied to your credit score. If you have a lower credit score this can mean your installment loan will have a higher interest rate.
- Some lenders have fees that can add up, there can be origination fees, late fees and application fees. (Don’t worry Marcus customers, we never have loan fees).
Which should I use? Installment Loans or Credit Cards?
Installment loans and credit cards each serve a different purpose and can be useful in their own way.
At the end of the day, though, an installment loan could be the best option to consolidate your debt—or for when you are in need of a large lump sum for an upcoming expense.
You could place personal expenses on your credit card, only to be hit with late fees if you forget to make a payment. Plus, the interest rate on your credit card could go up. This means your debt may just grow and grow, faster than you could say “higher interest rates.”
With Marcus, you could get an installment loan of up to $40,000—which may have a lower interest rate than a higher-interest credit card—to finance many of life’s needs.
Another thing to consider is, unlike your credit cards, Marcus loans have fixed interest rates. This could help you save money over higher-interest credit cards that, sometimes, increase their rates, forcing you to shell out more money each month.
Rather than worry about fluctuating payment amounts, you can select your loan amount and desired monthly payment.
Marcus Installment Loan benefits:
No fees. Ever.
No sign-up fees. No late fees—you just pay interest for the additional days. No prepayment fees when you pay off your loan early. No fees, period.
Fixed rates for the life of your loan.
Your interest rate is fixed, so you won’t have to worry about changing rates over the life of the loan or fluctuating monthly payments.
Easy online application process.
The application process is easy. Many Marcus customers receive their funds within 5 days.
Loan amounts up to $40,000.
Marcus installment loans range from $3,500 to $40,000 with terms from 3 to 6 years.