Should You Make Extra Payments on a Low Interest Loan?

If there’s one personal finance tenet you’ll see almost universal agreement on, it’s that you should pay off your high interest debts first and keep them paid off. Accumulating high interest debt is devastating to your finances because of the sheer amount of money that it drains from your checking account with nothing in return.

What about low interest debts, though? What if you have a debt that’s locked in at 3% or 4%? Does that debt need to be paid off, too? Also, where exactly is that line between high and low interest debt?

Before we dig in, let’s be clear about the benefits of making extra payments on a debt. When you get a bill for a debt in the mail, there are two key numbers you’re looking at. The first is the principal or balance, which is how much you currently owe. The second is the interest. That’s how much extra you owe that’s built up since your last payment. It’s based on multiplying your principal by the interest rate.

For example, if you owe $1,000 at a 12% annual interest rate, and you’re making payments once a month, your interest on your next payment will be $1,000 times 0.12 (that’s 12%) divided by 12 (because it’s one month out of the 12 months of the year), meaning you owe $10 in interest.

This is important because the amount of interest you owe each month goes down when you pay off principal. If you reduce that principal to $500, you only owe $5 in interest that month. Extra debt payments go entirely to the principal, making it that much smaller. Thus, when you make an extra debt payment, you’re lowering the amount of interest you pay every single month going forward (assuming you don’t add more to that debt). That’s why it’s so powerful!

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What is a “low interest debt”?

A low interest debt is any debt with an interest rate lower than what you could easily get with an investment. Depending on your perspective on investments, that number is somewhere between 7% and 12%. Warren Buffett projects that future investment returns should come in around 7% a year, so 7% is a pretty safe cutoff between low and high interest debt.

You should pay off high interest debt as fast as possible, because you essentially can’t do better than that through investing without some significant luck. It’s a pretty good guaranteed rate of return on your money (assuming, again, that you’re not accumulating any more high interest debt).

With low interest debt, it gets a bit trickier, as there are both pros and cons to paying off low interest debt early. Some people even consider low interest debt to be “good debt” because of some of the drawbacks.

Pros of paying off a low interest loan early

Benefits of paying off a low interest debt early include:

  • Fewer monthly bills, which means less financial stress any way you slice it. Simply having to come up with less money for bills each month is always a help.
  • Improved cash flow, which happens as a result of shrinking or eliminating bills. If you pay off any debt, you have a smaller stack of bills to pay off each month, which means that you can survive and thrive on a smaller amount of income or have more money available to save for long-term goals.
  • Financial progress happens even when you pay off a low interest debt. That’s money that’s not disappearing in the form of interest.

Cons of paying off a low interest loan early

Drawbacks of paying off a low interest debt early include:

  • Locked-up money, because money that could have been easily available in a savings account is now “tied up” in your loan. For example, you could have a $5,000 debt and $1,000 in savings, or a $4,000 debt and $0 in savings. While it’s nicer to have lower debt, it also means you don’t have that $1,000 easily accessible for emergencies, and that could turn quickly into credit card debt in an emergency.
  • Opportunity cost, which is an extension of the ‘locked-up money” problem. If you pay down a debt, that means that you don’t have the cash on hand to take advantage of an opportunity. If you put that $1,000 into a loan, you might not have $1,000 to take advantage of a great deal on replacing your fridge that’s nearing the end of its lifespan.

Don’t pay off a low interest loan early

If you do not have any other financial plans, the best strategy is to pay off high interest loans first, then make minimum payments on low interest loans and do other things with what would have been an extra payment, like building an emergency fund or bumping up retirement contributions.

An emergency fund is useful because it’s a buffer that keeps you from taking on high interest credit card debt in an emergency. For example, if your car breaks down and needs to go to the shop, you can just tap a cash emergency fund instead of putting a balance on a credit card. This should be a top priority once you have high interest debt under control.

If you have an emergency fund, transition to making sure that your retirement savings are well taken care of. Bump up contributions to your workplace retirement plan. If they offer matching funds, contribute enough to get every dime of it.

Except in these situations

Are there times when you should consider paying off a low interest loan quickly? The only time you should consider such a move is when you already have an emergency fund and you know that your monthly income is about to drop.

For example, if you have a few months of living expenses saved up and you’re considering a career change or a job change, then having lower monthly bills makes it much easier to move into a period where there might be less income moving in. Another example is if you’re about to retire with a fixed income, such as a pension, where you know that your monthly income will be lower and month-to-month survival is much easier if you have fewer bills.

In those situations, however, you should prioritize a healthy emergency fund over paying off low interest debt. Only pay off the debt if you have a few months of living expenses set aside in case things go badly.

We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com

Fixed and Variable Rate Loans: Which Is Better?

Reading over your loan options can feel like studying a foreign language. What is a fixed vs. variable loan? And what on earth is a rate index? Whether you are taking out a home loan or financing your next vehicle, you’re bound to come across some of the same terms. 

Having a fixed-rate loan is right for people who can lock in a low rate and have never been one for gambling. But that’s not to say that variable-rate loans don’t have their advantages. Let’s talk about the differences between these two loan types and what they can mean for your financial bottom line. 

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What is a fixed-rate loan vs. a variable-rate loan? 

The main difference between a fixed-rate loan and a variable-rate loan is that your loan payment remains the same with a fixed rate and may fluctuate with a variable rate. 

Let’s look at an example. 

Imagine you get a mortgage with a 2.75% interest rate over 30 years. Your bank will calculate your monthly payment, and it will remain the same over the entire term of your loan. Now let’s say you’re offered a variable-rate loan at 2.5%. That sounds appealing, but as interest rates rise in the real estate market, your rate could go up. Within five years you might be paying closer to 3.25% interest and owe a few hundred dollars more each month. 

Fixed-Rate Loan Variable-Rate Loan
Rates Stay the same over the course of the loan Fluctuate according to market conditions
Loan Amounts Vary by type of loan Vary by type of loan
Terms Remain the same for up to 30 years, depending on the type of loan Change based on market conditions, and may include a balloon payment at a designated time 

[ Read: Best Auto Loans ]

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Understanding fixed-rate loans 

What is a fixed loan? As mentioned above, a fixed-rate loan is one in which the consumer (that’s you) locks in an interest rate when they finalize their loan. That interest rate remains stable throughout the life of the loan unless you refinance. 

Fixed-rate loans are popular when it comes to financing ranging from auto loans to mortgages to personal loans. They are ideal for the risk averse or anyone who is lucky enough to be financing when rates are at historic lows. Many businesses also opt for a fixed-rate business loan because reliable loan payments make it easier to forecast future expenses and create profit goals.  

However, on the downside, a person locked into a fixed-rate loan may end up paying a higher-than-average interest rate if the market rates drop. For instance, a consumer who obtained a 48-month auto loan in the first quarter of 2020 would have likely been offered a 5.29 percent interest rate (based on average rates from commercial banks). A few months later, the average rate for the same loan had dropped to 5.13%. If locked into a fixed-rate loan, this consumer would be paying more per month than someone who got a loan in the following quarter. 

Understanding variable-rate loans

What is a variable loan? One of the primary benefits of a variable-rate loan is that the initial interest rate is often lower than what you’re offered for fixed-rate loans. This can be appealing for consumers who are on a tight budget. However, variable-rate loans don’t remain stagnant. 

Most variable-rate loans fluctuate based on something called the prime rate. The prime rate may also be called the base rate. This rate is determined by individual banks, but influenced by the federal funds rate (this is the rate banks charge each other for short-term loans).The Fed, short for The Federal Reserve System analyzes current economic conditions eight times throughout the year and adjusts the federal funds rate accordingly. As the federal fund rate rises or falls, so typically does the prime rate that directly affects variable-rate loans.   

You may be offered variable-rate loans for a variety of funding, but usually these loans apply to long-term loans. Student loans and home loans are the most likely to offer adjustable rates. Home loans may have a fixed rate for a set period initially (often five years) at which point the rate is subject to change. After the housing bubble burst in 2008, only 10-15% of buyers chose a variable-rate mortgage between 2008 and 2014, despite the fact that historically up to 30% of buyers had opted for an adjustable rate. 

What are interest rate caps? 

If you choose a variable-rate loan, your lender will outline the interest rate caps as a part of the loan terms. You can think of these caps as ceilings on the interest rate. An interest rate cap can affect how high your rate is able to rise, or how many points it can increase at once. 

There are three main types of interest rate caps. The initial adjustment cap affects how much your interest can increase when the fixed-rate period ends. Often, this cap says that your interest rate can’t go up by more than a few percentage points when the fixed term ends. 

After this initial period, you may also have a subsequent adjustment cap. This outlines how many points your interest can increase at once for every future period. 

Finally, there is a lifetime interest cap. This is the rule that spells out how much your interest rate can increase over the initial rate for the entire loan. For instance, your lender may agree to never increase your interest rate to more than 5% over your original interest rate. If you paid 2.75% at the start of your loan, your interest rate would never be above 7.75%. 

[ Read: Best Personal Loan Rates for 2021]

Check Your Personal Loan Rates

Answer a few questions to see which personal loans you pre-qualify for. It’s quick and easy, and it will not impact your credit score.

Should I get a fixed-rate or a variable loan? 

Whether you should get a fixed-rate or variable-rate loan depends on a variety of factors. If you’re on the fence, consider these insights as you navigate the loan application process. 

Loan Type Fixed Rate Loan Variable Rate Loan
Personal Good for consumers with good credit who can access low rates Good for short-term loans when the rate doesn’t have much chance to fluctuate drastically
Student Best when variable rates are high and a precise budget is a priority Best when fixed rates are currently high and are likely to drop
Mortgage Ideal for buyers who are planning to stay in the home for the long term Only works for buyers who can handle a higher payment than they currently pay
Business Great for small businesses who need a reliable budget in order to make ends meet Great for thriving businesses who believe interest rates will drop and can get approved for a refinance if rates increase

We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com

What Is Mortgage Recasting and How It Can Save You Money

If you are eager for a way to save money on your mortgage, one popular option is through mortgage recasting, or when a large payment allows you to re-amortize your mortgage and reduce your monthly payments. Here, we go through the pros and cons to recasting a mortgage.

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What is mortgage recasting?

Mortgage recasting, also known as mortgage re-amortization, is when a borrower makes a lump sum payment toward their home loan balance. The lender re-amortizes the loan, and the borrower’s monthly payments are adjusted, though the interest rate and loan term stay the same.

Recasting saves borrowers money in two different ways. First, re-amortizing the loan based on the new principal balance reduces a borrower’s monthly payments. The homeowner will also save money on interest over the course of their loan since there’s a lower balance to accrue interest on.

Many lenders allow borrowers to recast their mortgages, including those purchased by Fannie Mae and Freddie Mac. However, government-backed loans such as FHA loans and VA loans aren’t eligible.

[ Read: Compare Today’s Best Mortgage Rates ]

How does mortgage recasting work?

Suppose a mortgage borrower had a current principal balance of $200,000 with a 30-year term and an interest rate of 3.5%. If they continue making their regular mortgage payments, they can expect monthly payments of about $898. By the time they pay off the full mortgage, they’ll have paid around $123,000 in interest.

But imagine instead that they spend $30,000 to recast their mortgage, bringing their new principal balance down to $170,000. Using the same 30-year term and 3.5% interest rate, their new monthly payments will be just $763 per month. And they’ll ultimately pay about $105,000 in interest, saving themselves about $18,000.

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Pros of mortgage recasting

Mortgage recasting can be an excellent way to help homeowners save money on their home loans. Similar to mortgage refinancing, it can help borrowers pay less money in interest. There are a handful of benefits to recasting and a couple of reasons why homeowners might prefer it over refinancing.

  • Lower monthly payments. Recasting your mortgage reduces your monthly payment because it takes a smaller principal balance and spreads it across the same loan term.
  • Less interest paid overall. Because of the new lower principal balance, mortgage recasting results in paying less interest over the course of the loan.
  • Fewer requirements than refinancing. Mortgage refinancing comes with many hoops to jump through, including an appraisal and qualifying for a new loan. Recasting is far simpler, and you don’t have to meet special financial requirements.
  • Less expensive than refinancing. When you refinance your mortgage, you have to pay a whole new set of closing costs. Mortgage recasting only comes with a small fee.

[ Read: Compare Today’s Best Mortgage Refinance Rates ]

Cons of mortgage recasting

Despite its perks, mortgage recasting isn’t right for everyone. In some cases, an alternative such as refinancing might be a better fit.

  • Mortgage recasting fee. When you recast your mortgage, you’ll have to pay a small fee, often around $250. While this is significantly less than the amount you’d pay in closing costs to refinance a mortgage, it’s still something to consider.
  • No reduced interest rate. When you refinance your mortgage, you often get the benefit of a lower mortgage interest rate, which can save you 10s or even hundreds of thousands over the life of the loan. Recasting doesn’t lower your interest rate — it only reduces the principal balance that accrues interest.
  • No shortened loan term. Mortgage recasting doesn’t shorten your loan term. If you had 20 years left on your loan, you still have 20 years left after recasting. However, your new lower monthly payment leaves more money available in your budget, so it may be easier to pay your mortgage off early.
  • Not available for all mortgages. Not everyone is eligible to recast their mortgage. Government-backed loans such as FHA loans and VA loans generally aren’t eligible. However, those mortgages are eligible for refinancing, so homeowners with those types of home loans may consider that instead.

Qualifying for mortgage recasting

Not everyone is eligible for a mortgage recasting. It’s best to talk to your lender about their requirements and find out whether you qualify. Here are some common requirements you’ll likely run into:

  • No government-backed loans: Government-backed loans such as FHA loans and VA loans aren’t eligible for mortgage recasting.
  • Recasting with your current lender: Not all lenders offer mortgage recasting. And unlike mortgage refinancing, you can’t simply recast with a different lender than the one that services your loan.
  • Recasting minimum: Many lenders require borrowers to make a minimum recasting payment. Lenders typically require that your payment is at least $5,000.
  • Equity and payment requirements: Some lenders may have requirements stating you must have a certain percentage of equity in your home or that you have made a certain number of on-time payments before recasting.
  • Recasting fee: Most lenders charge a small fee to recast your mortgage. The fee is typically around $250, meaning it’s a drop in the bucket compared to the lump sum payment you’ll make. But it’s important to be aware of and budget for this fee.

[ Read: Best Investment Property Mortgage Rates ]

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We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com

Financing Home Improvement Projects During Coronavirus

Many of us are home much more than usual these days, and you may be thinking about ways to improve your home — whether it’s expanding your new home office, upgrading your air conditioning, or putting in a new swimming pool for the summer. It’s easy to dream about those fun new projects, but figuring out how to pay for them can be a challenge.

It’s not just your lifestyle that’s been impacted by the coronavirus pandemic. Many banks, lenders, and fintech companies are changing the way they lend money to customers, so your options for financing a home improvement project may have changed.

In the first few months of the coronavirus outbreak in the United States, many lenders pulled back on Home Equity Lines of Credit and Cash Out Refinances — either halting new applications or tightening the approval criteria. The best financing options may be changing based on what’s available at a given time, so take the time to investigate what is going on in the market and what your options are. Here’s a place to start.

This article will walk you through:

  • Key questions to ask yourself when evaluating your financing options
  • 5 financing options you might be considering, and the pros and cons of each option
    • HELOC
    • Cash-out Refi
    • Personal Loan
    • Traditional Credit Card
    • Fintech Alternatives

What questions should you ask yourself when choosing a financing option for your home improvement project?

  1. Are you in a hurry to get started? Do you need to replace a major appliance immediately, or do you have some time before construction begins? Some financing is faster than others, but you may pay a price for speed.
  2. Will your costs happen all at once or overtime? If your project will have ongoing costs (like many home improvement endeavors) it might be attractive to only pay interest on what you’ve spent and to have the flexibility of revolving credit that allows you to spend, pay it back, and spend again.
  3. Is the cost of your project a sure thing or will it creep up? Even the best budgets have surprises. Choosing a more flexible financing option now may prevent you from having to apply for credit again later, which may save you money and limit hard inquiries which can ding your credit score.
  4. Do you have equity in your home you can tap into? Do you want to? Financing that relies on the equity in your home often has lower interest rates than unsecured options. If you have equity available in your home, are you comfortable using your home as collateral and potentially risking foreclosure if you can’t make your payments?
  5. How much flexibility do you need in your monthly payments? In a time of uncertainty, it may be more attractive to choose an option with fixed rates and payments that you can plan around.
  6. What is available in the market right now? In a time of unprecedented uncertainty, many lenders have temporarily stopped offering certain products or seriously raised the bar for what it takes to qualify. Make sure you aren’t counting on funding from a financing product that isn’t available anymore. What are your financing options? The news about COVID-19 changes daily, so keep in mind that the economy, stock market, and the lending policies of various lenders may change.

What are your financing options?

The news about COVID-19 changes daily, so keep in mind that the economy, stock market and the lending policies of various lenders may change.

1. Home equity line of credit (HELOC)

What is a HELOC and how does it work? A HELOC is a revolving line of credit (like a credit card), which means you can borrow as much as you need, when you need it, up to the limit on your credit line. As you pay down the balance, you can borrow more money again.

Your credit line is based on the equity in your home and your credit, so you must own your home and have some equity built up in order to qualify for a HELOC.

What are the Pros and Cons of a HELOC?

Great for:

  • Projects with ongoing expenses — flexibility to spend, pay down the balance, spend again
  • Paying less interest — lower rates than most unsecured products, and revolving structure where you only pay on the amount you’ve borrowed
  • Tax deductions — some opportunities for a tax deduction of interest, depending on how the funds are used
Not great for:
  • Renters, as they are not eligible for dwelling-secured financing
  • Homeowners worried about foreclosure risk
  • Fast funding — underwriting and appraisal process means it can take weeks to get your money
  • Payment- or rate-sensitive people — rates are typically variable so may rise
  • People looking for financing right now — several banks halted new HELOC applications in May in response to the COVID-19 pandemic so availability may be very limited.
Bottom Line on HELOCs
HELOCs are often one of the more affordable and flexible financing options for home improvement work, but it may be especially difficult to get one in the current environment and the process is lengthy compared to other options.

2. Cash-Out Refinance

What is a cash-out refinance and how does it work? A cash-out refinance is when you replace your existing mortgage with a new mortgage for more than you owe on your home. The difference goes to you in cash, which you can spend on whatever you want.

Your cash out amount is based on the equity in your home and your credit, so you must own your home and have some equity built up in order to qualify for a cash-out refinance.

What are the Pros and Cons of a Cash-Out Refinance?
Great for:
  • Paying less interest–rates typically lower than unsecured products and many HELOCs
  • Simplified, predictable payments — single monthly payment for your mortgage and your home improvement project, with fixed rates widely available
  • Tax deductions — some opportunities for a tax deduction of interest, depending on how the funds are used
Not Great For:
  • Renters, as they are not eligible for dwelling-secured financing
  • Homeowners worried about foreclosure risk
  • Payment- or rate-sensitive people — your rate on your entire mortgage may go up due to a higher loan amount
  • Fast funding — underwriting and appraisal process means it can take weeks to get your money
  • People looking for financing right now — due to COVID-19, many lenders have tightened requirements for mortgages in general and cash-out refis in particular
Bottom Line on Cash-Out Refinancing

Cash-out refinancing can be an affordable, fixed-rate option for financing your home improvement project but the process may take considerably longer than it would have during pre-pandemic days and the requirements may be more stringent.

3. Personal Loans

What is a Personal Loan and how does it work? Personal loans are unsecured loans that you receive as a lump sum of cash to use however you like. They typically have fixed rates and terms, which means you pay the loan back in set installments over a set period of time.

What are the Pros and Cons of a Personal Loan?

Great For:

  • Fast funding — approval process is fast and usually 100% online
  • Renters, homeowners concerned with foreclosure risk — available regardless of housing status
  • Fixed scope of work — lump sum of cash makes it harder to overspend on your project
  • Better rates than other unsecured options — rates are generally lower than traditional credit cards

Not Great For:

  • Projects with ongoing expenses or unclear scope — lump sum of money can only be used once without borrowing again. May result in additional hard inquiries and a negative impact on your score if you need more credit
  • Paying less interest — you pay interest on your total outstanding balance, regardless of how much you’ve spent
  • Some homeowners — rates are typically higher than secured options

Bottom Line on Personal Loans

Personal loans are a fast and affordable way to borrow a set amount of money. This may be a good fit for a project with a set budget or a lot of one-time, up-front cost.

4. Traditional Credit Cards

What is a traditional credit card and how does it work? Most of us are familiar with traditional credit cards. They are revolving lines of credit, which means you can spend up to your credit limit, and then pay back your outstanding balance and spend again. They can be used wherever credit cards are accepted, and some offer (expensive) cash options as well.

What are the Pros and Cons of a Traditional Credit Card?

Great For:

  • Fast funding — approval process is very fast and many cards are available for instant use
  • Projects with ongoing expenses — the flexibility to spend, pay down the balance, spend again
  • Pay for what you use — revolving structure means you only pay interest on what you’ve spent
  • Potential for attractive short term rates — promotional rates may save you money in interest if you can repay quickly

Not Great For:

  • Paying less interest — higher rates than most other options
  • Predictable payments — rates are typically variable and can rise
  • Overspenders — cards make it easy to overspend and run up unmanageable debt
  • Cash expenses — most cards have very expensive cash advances

Bottom Line on Traditional Credit Cards

Traditional credit cards are ubiquitous but expensive. They offer speed and flexibility compared to many other options but they will almost certainly cost you more money.

5. Fintech Alternatives

What alternatives are available?

Online financial technology (fintech) companies offer a variety of financing alternatives that may work well for your situation. Here are a few examples:

  • Upgrade Card
    • Upgrade Card combines the flexibility of a card (can be used wherever VISA(R) is accepted) with the low cost and predictability of a personal loan (each month, purchases are converted to a fixed-rate installment loan). This option is great for projects with ongoing expenses and for rate-sensitive people looking for quick funding.
  • Affirm or Afterpay
    • These companies offer fixed-rate installment loans at the point of sale at many retailers. This might be a great fit for a home improvement project with a big upfront cost from a single store (for example, new furniture from one retailer) but offers less flexibility than other revolving products.
  • More!
    • Fintech companies are always introducing new products, so it’s worth taking the time to see what else is out there.

Bottom Line

Financing your home improvement project during a pandemic may complicate things, but it doesn’t need to hold you back. Don’t be discouraged if the loan you’d planned to apply for isn’t available — take the time to understand your financing options and keep an open mind. There may still be a great way to get the home office or backyard of your dreams!

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What You Need to Know before Taking out a Personal Loan

Did you know the average American is approximately $38,000 in personal debt, with credit card debt being the leading source? With such a large amount of debt, personal loans are becoming more and more popular, especially for credit card debt consolidation. In the last year alone, 34% of Americans took out a personal loan.

Personal loans can be used for a variety of reasons, whether that be for debt consolidation (the most popular reason for taking out a personal loan), medical expenses, home improvements, etc. But how do you know if a personal loan is right for you? Everyone’s financial situation is unique, so you want to make sure you understand personal loans before you determine if a personal loan is the best way to go.
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Here are a few things you should know before taking out a personal loan.

Using Personal Loans for Debt Consolidation Isn’t for Everyone

Although personal loans are a common solution for debt consolidation, that doesn’t mean it’s right for you. Here are a few indicators that debt consolidation through a personal loan is not the best solution and you’d be better off seeking debt counseling or another financial avenue.

  • With your current financial pace, your debt will be paid off in less than a year. If this is the case, debt consolidation likely will not be worth it.
  • You can’t afford the personal loan monthly payment. You don’t want to be stuck with an additional payment that you can’t afford. This could lead to late payments or worse, loan default.
  • You will pay more interest and fees with a personal loan compared to your existing debt. You don’t want to take out a personal loan if it will cost you more money in the long run.
  • Your spending isn’t under control and you might wrack up more debt after you pay off your existing debt. There’s no point in taking out a personal loan to consolidate your debt if it will just tempt you to accumulate more debt on paid off credit cards.
  • Your credit score isn’t good enough to get you an acceptable interest rate. You might want to take the time to improve your credit before applying for a personal loan.

Consider these statements and compare current debt costs to the costs of a personal loan to determine if debt consolidation is the best option. Also, note that not all personal loan providers are the best for debt consolidation. Some lenders specialize in debt consolidation, whereas others don’t have good enough offerings to make debt consolidation with their loans worth it.

Personal Loans Can Be Secured or Unsecured Loans

The majority of personal loans are unsecured loans. This means you do not have to offer up any sort of collateral to receive the loan. Types of collateral could include owned property, a house, a car, etc—anything the lender can use to pay back the money owed if you default on the loan.

However, not all personal loans are unsecured, and some lenders offer secured loans that require collateral. For example, if you have little to no credit or a poor credit score, lenders may only offer you a secured loan because your credit report isn’t a good enough indicator that you will pay back the loan. If you don’t mind putting up collateral and you intend to pay back the loan in full, secured loans don’t have to be a bad thing.

You Should Compare APRs before Selecting a Personal Loan Provider

The APR (Annual Percentage Rate) combines the personal loan interest rate and any additional loan fees, and it fluctuates based on the personal loan provider. APRs typically range between 5% and 36%, and this is partly determined by your credit history.

Popular personal loan providers, such as Best Egg and FreedomPlus, are known for low APRs, especially if you have an above average credit score. However, if you have a quality credit score and a loan provider is still requiring a high APR, you might want to consider looking into the best personal loan companies for a better APR. A bad APR could cost you hundreds of unnecessary dollars over the course of the loan.

Getting a Personal Loan Is a Hard Inquiry on Your Credit Score

A hard inquiry is when a lender or creditor pulls your credit for the purpose of offering you a loan. This will ding your credit and decrease your credit score by five to ten points. The hard inquiry will remain on your credit report for up to two years. However, if you pay back your loan on time and take care of your credit in the meantime, your credit score will recover.

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It’s also important to note that you should keep your loan shopping to a minimum. In other words, only apply for personal loans for a span of two weeks to a month at the most. Any longer and you might receive multiple dings on your credit report rather than just one.

Accepting the Max Loan Offer May Not Be the Best Option

Personal loans can range between $2,000 to $50,000, and some lenders, such as SoFi, offer as much as $100,000 loans. With that in mind, you may qualify for a large amount, but that doesn’t necessarily mean you should take the highest offer. Consult your finances and budget before deciding what personal loan amount to accept because if you accept one for more money than you can afford, you will likely regret this down the road.

Check Your Credit before Applying for a Personal Loan

Most personal loan providers require at least a 640 credit score. However, some companies such as FreedomPlus and UpStart, offer loans to 620 credit scores and up. Keep in mind that if you pay your personal loan payments on time and responsibly handle your other credit responsibilities, a personal loan can increase your credit in the long run and immensely help your credit card utilization rate if you choose to use it for debt consolidation.

Before you determine if a personal loan is right for you, make sure to check your credit. You can pull your credit score for free at any time as well as get one free copy of your credit report each year.

Source: credit.com

Mint Money Audit: 4 Steps for Getting Out of Debt Once and For All

March Mint Audit: Samantha, mom of two, struggling to pay off $41,000 in credit card debt

Samantha contacted me recently to ask how she and her husband could squash their $41,000 in credit card debt once and for all. She works as a media trainer for executives. Her husband works for the city government. Together they earn an annual net income of about $100,000 (after taxes, retirement savings and health insurance).

They more or less live paycheck to paycheck after accounting for all their bills and expenses. They have $1,000 in savings.

More about Samantha’s family: The couple has two kids, ages 10 and 14. Their children have various expenses tied to sports, activities and birthday parties, which Samantha says can really take a big bite out of their remaining monthly funds.

Here’s a snapshot of their top monthly expenses:

  • Mortgage: $3,300 (including property taxes)
  • Car payments, including loans, EZ Pass, insurance and gas for 2 cars: $1,500
  • Groceries: $1,200 per month
  • Credit Card Debt Minimums: $1,100
  • Utilities: $630 (includes cable, internet, energy and water)

Here’s my four-step plan on how they can adjust their finances to tackle credit card debt to become debt-free in four to seven years and save another $7,500 (or more) over the next year for a rainy day.

Step 1: Get Organized. Consolidate Debt.

Part of their debt overwhelm is not just the hefty $41,000 balance. It’s the number of credit cards they posses: 11 cards in total.  That means they receive 11 separate bills every month (at likely various times), which makes the debt very hard to track and analyze. It also makes it challenging for them to create a payoff plan. It may be why they resort to only paying the minimums on each card.

My advice: Consolidate all the credit card debt into one (or two) personal loan. The average interest rate on their credit cards is about 19%. Begin by reaching out to a local credit union or community bank to see if the couple can qualify for a personal loan for $41,000 and an interest rate at or below 19%. (The higher their credit score, the more likely they can qualify for personal loans with attractive interest rates.)

You can search for competing loan offers on Mint, too. Also, a new online lender on the market, Marcus.com (a division of Goldman Sachs) is promoting fixed-rate, no-fee personal loans of up to $30,000 for those who want to eliminate high-interest credit card debt. At LendingClub, a peer-to-peer lending marketplace, you can also apply for loans of up to $40,000.

Using this loan to pay off all their credit card balances, leaves them with 10 fewer bills each month. Even if they need to take out two personal loans (because $41,000 may be too high a loan for one bank to lend), it’s better than their current scattering of bills.

One thing to watch out for when applying for a personal loan: Some lenders may charge an origination fee of up to five or 6% of your loan balance, depending on your credit rating. Shop around and ask for fee waivers. You can also use a loan calculator to determine how long it will take to pay the personal loan off.

Step 2: Dedicate One Paycheck Mostly to Debt.

To further simplify the family’s effort to become debt-free fast, I suggest one spouse’s income be allocated towards the consolidated debt while the other spouse’s income cover most of the necessities. By dedicating one income stream to the debt, it’s again, easier to track.

Let’s pick Samantha’s husband, who brings home anywhere from $3,000 to $4,000 a month, depending on his overtime schedule.

If the couple can score a loan with, say, a 15% interest rate and a seven-year term, that equates to a minimum monthly payment of about $800 a month for Samantha’s husband. By allocating an extra $300 a month to the principal (for a total of $1,100 or what they’re currently paying), they can be debt-free in closer to four years.

With around $2,000 left in his monthly paycheck, Samantha’s husband can also contribute to groceries ($1,200) and utilities ($650). That leaves $150 for savings. With his overtime income (up to $1,000 per month), I suggest he funnel that also into a savings account.

Meantime, Samantha, who brings home roughly $5,000 per month, can dedicate her income to the mortgage ($3,300) and car payments ($1,500), with roughly $200 left over for savings.

Cash Savings: $350 – $1,350 per month

Step 3: Reduce Utilities & Food

Also, is there any way they can knock down food and utility expenses?  (My recommendation is to nix cable. We did this a few months ago, but with an Apple TV, an $8 monthly Netflix subscription and loads of free apps, we don’t miss much. That move alone could save the family $200 per month or $2,400 a year.)

The family’s food budget currently eats up 15% or $1,200 of their take-home pay. But to live below your means, food budgets should amount to no more than 10% of one’s take-home pay. If they can stay below that limit, they could save $400 per month.

Cash Savings: $600 per month

Step 4: Budget for the Sometimes Extras

Using Mint’s budget meter, create a spending cap for other miscellaneous spending categories. From birthday gifts to sports team fees and equipment, keep a close eye on these expenses. From the $950+ in monthly savings the family may start to accumulate with my advice, they could ration out a few hundred dollars per month for these incidental costs and still end up with another $7,500 or more in savings within a year.

Finally, when their children can start working, encourage them to find summer jobs to help pay for their school year activities. That can also help the family save much-needed cash for their debt and savings.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

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Source: mint.intuit.com

Pool Loan Calculator: See Your Monthly Payments

Once you have a solid cost estimate for your new pool and you’ve decided to finance it with a loan, the next step is to figure out your monthly payments so you can budget for them.

Enter a loan amount, repayment term, and estimated APR to see how much you might pay each month and the total interest.

How much does it cost to build a pool?

An above-ground pool costs $2,500 on average, according to HomeAdvisor, while an inground pool can run you $50,000 or more. The price can vary based on the size of the pool and materials you use.

When you finance with a personal loan, your annual percentage rate can be anywhere from 6% to 36%, and some lenders will finance up to $100,000 over a two- to 12-year repayment term.

Your credit score is an important factor lenders consider when they decide your loan amount and rate. On average, NerdWallet members with excellent credit (720 or higher FICO) received pre-qualified loan offers with rates between 10.7% and 12.5% in 2020, according to marketplace data. Lenders also consider factors like your income and existing debt.

A $50,000 loan with a six-year repayment term and a 11% APR would require monthly payments of $952. That loan would cost $68,544 in total, and $18,544 of that would be interest.

How to compare pool loans

Here are a few features to consider as you compare offers.

Annual percentage rates: APRs are the best apples-to-apples comparison for personal loans because they include the interest rate and other fees a lender charges. You can use this rate to compare offers between loans or to compare a loan with other financing options like a home equity loan.

Repayment terms: Most personal loan terms span from about two to seven years, but some lenders offer extended repayment terms on home improvement loans. For example, online lender Lightstream lets borrowers choose a repayment term up to 12 years. Your repayment term determines your monthly payment and the loan’s total interest — the longer your repayment term, the more you pay in interest.

Funding time: Some online lenders say they can fund a loan the day your application is approved or the following day. Banks and credit unions, however, can take a few days. Most personal loans can be funded within a week, though.

Ability to pre-qualify: Many online lenders let you pre-qualify to see your potential rate, loan amount and repayment term without affecting your credit score. You can pre-qualify with multiple lenders at once on NerdWallet to nail down another estimate of your monthly pool loan payments.

Source: nerdwallet.com

Dollar Connect Personal Loans Alternatives

When you need some quick cash to see you through until your next paycheck, personal loans are the best choice. Fast personal loans, like the ones that Dollar Connect used to offer, are a quick way to borrow money in a financial emergency. And if you have bad credit, most lenders can still cater to you.

There are various lenders that have personal loans, and in recent times, Dollar Connect used to be a marketplace for connecting people to such lenders. With the platform shutting down, many people in search of lenders for poor credit and personal loans in an emergency might face inconvenience. At The Simple Dollar, we have rounded up the four best alternatives to Dollar Connect, based on the interest rates, loan amounts, customer satisfaction and support and fees using the SimpleScore methodology.

Check Your Personal Loan Rates

Answer a few questions to see which personal loans you pre-qualify for. It’s quick and easy, and it will not impact your credit score.

Refreshing data.

We found results in California.

In this article

The best alternatives to Dollar Connect personal loans

Compare the best alternatives to Dollar Connect

Lender APR Terms Loan Amount
OneMain Financial 18%–35.99% 24–60 months $1,500–$20,000
RISE Credit 50%–299% 4–26 months $500–$5,000
LendingPoint 9.99%–35.99% 24–48 months $2,000–$25,000
Avant 9.95%–35.99% 24–60 months $2,000–$35,000

Best for joint applications – OneMain Financial

Not all personal loans allow co-signers but OneMain Financial has you covered with its quick and easy loans.

APR Range

18%–35.99%

Loan Amount

$1,500–$20K

Term

2–5 years

SimpleScore

3.3 / 5.0

SimpleScore OneMain Financial 3.3

Loan Size 3

Customer Satisfaction N/A

As one of the largest personal lenders in the country, OneMain Financial stands apart from other companies by focusing on customers with poor credit. Headquartered in Indiana, OneMain Financial has offices in 1600 locations across the country, and you do not require a minimum credit score to be able to qualify. The rates are fixed, there are no prepayment fees, and the loan can be repaid in easy monthly payments. Applications can be filed online and loans are usually funded in one business day. The best part? You get to add a second borrower and file a joint application.

All the perks aside, OneMain Financial tends to charge steep interest rates for personal loans. There’s a seven-day grace period but the longer you take, the more expensive the loan becomes. For larger loans, you may also require a collateral, and you must visit the lender’s office to be able to close a loan.

secured personal loan option against your car, letting you borrow up to $35,000 with next-day funding. Started in 2012, this online platform charges rates on a par with other bad credit personal loans, and the minimum credit score required is 550. You have the option to change the payment date, get a soft credit check with pre-qualification, and for people with fair credit, a secured loan can have interest rates as low as 9.95%. Additionally, Avan’ts mobile app makes it easy to manage your loan on the go.

However, you cannot add a co-signer or have your debts paid off directly to the creditors in case of debt consolidation. Avant also charges an origination fee of 4.75%.

Personal loans are a good way to get some quick cash for emergencies, such as:

Medical expenses

If you or a family member takes ill and requires immediate treatment or hospitalization, it can lead to unforeseen expenses. Even if you have insurance, it might not cover everything. Personal loans are usually funded in less than a day but also come with exorbitant interest rates, which might be more expensive than the cost you are trying to cover. As an alternative, borrowing money from a friend or relative or using your credit card are easier and more flexible ways to get urgent money.

[Read: The Common Types of Personal Loans, Explained]

Emergency repairs

A leaking roof, a burst pipe or a broken car call for emergency repairs. Your insurance might reimburse you later, but when it’s an urgent need, you have to pay out of your pocket. Personal loans are often used for covering such expenses, but the interest rates might leave you with expensive repayments over the next several months. If you have a credit card, you can use it for emergency funding at a much lower interest rate and more flexible terms. You can also borrow money against fixed deposits or sell assets like jewelry or art for quick cash.

Supplementing income after job loss

In uncertain times, being laid-off from work can make it harder to pay for emergency expenses. It isn’t difficult to get personal loans even if you have bad or no credit with no income, but you will be saddled with steep repayments for many months, which can be almost impossible without a job or another source of income. If you’re still taking out a personal loan, it is best to have a collateral and make it a secured loan.

Check Your Personal Loan Rates

Answer a few questions to see which personal loans you pre-qualify for. It’s quick and easy, and it will not impact your credit score.

Personal loan FAQs

According to the Federal Reserve, the average rate for a two-year personal loan is 9.65%, though this can vary based on where you live, your credit score and income.

Terms for personal loans can differ from one lender to another, but the typical term is anywhere between 24 and 60 months.

A secured loan, where you borrow money against an asset, is the easiest personal loan to be approved for and much quicker than an unsecured loan. Typical assets you can borrow against include vehicles, jewelry, expensive art and collectibles.

Lenders that offer personal loans of all types are available all over the country. You should choose the lender according to your credit history and if you aren’t sure, it is best to select a bad credit lender. Approval and finding usually take less than a day, and since these are short term lending, they often come without the complicated processes of a traditional loan.

Dollar Connect was not a lender; it was an online marketplace that matched borrowers with lenders. The platform is no longer in business.

We welcome your feedback on this article and would love to hear about your experience with the lenders we recommend. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com

How to Find Better Alternatives to Payday Loans

Life is full of surprises, and some of those can impact your budget at an inopportune time. A surprise car repair, medical bill or other expense can cause you to think about simple, fast loans like payday advances.

However, payday advances are detrimental to your finances. While they may seem like simple, fast loans, the average interest rate of a payday advance is almost 400%, making it much more difficult to repay it within the tight window of just a couple of weeks.

Instead of going down this road, consider the alternatives to expensive payday lending. That way, you can receive cash advances without the high interest rates.

In this article

Check Your Personal Loan Rates

Answer a few questions to see which personal loans you pre-qualify for. It’s quick and easy, and it will not impact your credit score.

6 better alternatives to payday loans 

Use a paycheck advance app 

There are paycheck advance apps like Earnin and Dave that offer you money in an emergency. Many of these apps work by having you sign up for an account, then link your bank account to verify income. However, in Earnin’s case, you can also upload an approved timesheet or let the app use location services to determine when you are at work.

After doing so, the app determines if you are eligible for an advance. If you are, you can take it at that time (in some cases receiving it the same day) and repay it on your next payday. Earnin and Dave do not charge fees. Instead, you can donate to help them offer the platform to those who need it.

Apps like these are perfect if you need to use them in a pinch. However, over time, those donations can add up. And the short repayment window means you could get on a cycle of repeatedly using them to make ends meet.

Pros Fast set up
Money same day
No interest
Cons Must link a bank account
Short repayment time
Cycle of financial dependence

[ See: Emergency Loans: What They Are and How to Get One ]

Borrow from a friend or relative

If you do not want to go the payday or alternative credit union route, you could ask your friends or relatives to borrow money. In some cases, it could be more financially-friendly for you since you won’t have to pay the high interest rates associated with payday loans.

Moreover, it’s vital to be on the same page when it comes to repayment. Let them know the reality of your situation and when you intend to repay them. Doing so ensures both people know what to expect before going into this venture.

The pros of this approach are you might be able to dictate terms more so than you would with a lender. By informing them of your situation, together, you can construct a repayment plan that works for both.

Of course, if you do not repay them, then you could fracture a friendship or relationship with a loved one, which is far worse than a blemish on your credit report.

Pros Flexible repayment
Financial accountability
It can be cheaper
Cons It’s uncomfortable to ask
Could fracture relationships
You might not dictate terms

Pawn or sell things you no longer use

Selling or pawning valuable items can help you receive the money you need in a pinch. Selling is the smarter option if you do not mind parting with the item(s) permanently. There are many online marketplaces available for you to use, and you could have more control over how much you charge for it.

Meanwhile, pawning can be a more expensive, short-term option. With pawning, you bring your stuff to a pawnbroker, who, if interested, will loan you money. The loan is a fraction of what the actual value of the item is. If you do not come back in to pay off the loan, they will sell your item.

Of the two, selling might net you more money than pawning your items. However, with pawning, you do have the option of getting your item back as long as you repay the loan in the time the pawnbroker gives you.

Pros Easy to sell
Selling gives you flexible terms
Pawning gives you fast cash
Cons Pawning is expensive
Selling can take time
Might not receive item’s value

[ Related: 7 Ways to Avoid Debt in a Financial Emergency ]

Get a side hustle

A side hustle is like a part-time job in that you can supplement your income each month, reducing your need to borrow money from lenders or family members. Most important, it can be a longer-term solution to helping you balance out your budget.

Best of all, there are many side hustles you can do. You can shuttle people across town through ridesharing apps, deliver food, receive payment for pictures you take and even earn income by renting out your car for use.

As you can see, there are many options available for doing this. However, it’s smart to research each in more detail before doing one.

To demonstrate, while you can make money doing a rideshare gig like Uber, the job requires significant wear and tear on your vehicle, not to mention the added costs of fuel, insurance, tolls and more. Therefore, be sure to research the risks associated with the side hustle before committing to one.

Pros Supplement incomeGigs are easy to doUse your assets for cash
Cons Wear and tear on car
Pay is inconsistent 
No work/life balance

Ask your employer for an advance 

If the other alternatives are not viable for you, you could ask your employer for an advance on your paycheck. While each company has differing policies on how it approaches employee advances, in general, how it works is you get your paycheck just a few days earlier than you normally would.

It might be a better short-term option since you do not incur hefty interest rates or fees as you would with payday loans and pawning. And the process can be easy if your employer has a policy in place for advances.

That said, there are some things you want to consider. One, you might have to repay the advance on your next paycheck. If your finances are tight, it could open a door where you have to use an advance regularly. Two, your employer might cap how many advances you can have. Therefore, while it is a convenient way to receive short-term help, it also comes with some considerations.

Pros Easy to do
Could have flexible repayment terms
Fewer fees
Cons Could have tight repayment window
Caps on advances
Not a long-term solution

Adjust your tax withholding

Are you receiving a large refund when you file your federal taxes each year? If you are, then adjusting your tax withholding with your employer might be a wise option to try.

How it works is you can request a new W-4 from your employer. From there, you can adjust your withholding to include any changes that have happened in the past year. To demonstrate, if you were married but are now divorced, you might qualify for head of household status, entitling you to higher deductions and a lower tax liability.

Furthermore, if you recently had a child, you receive a $2,000 deduction. Therefore, as your life changes, it’s ideal to reflect that on your withholdings.

However, if you do not receive a refund on your tax return and change your withholdings to squeeze more money out of each paycheck, know you could have a huge tax liability when you go to file.

Pros Change W-4 at any time
Receive deductions
More money on each check
Cons Won’t apply to everyone
You might owe taxes
Changes take time to implement

Check Your Personal Loan Rates

Answer a few questions to see which personal loans you pre-qualify for. It’s quick and easy, and it will not impact your credit score.

We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com

Best Installment Loans of 2021

Installment loans are a great financial tool for people who want to make a large purchase and don’t have the cash to do it. Unlike credit cards, which you might use to borrow revolving amounts and pay them back as you go, installment loans involve borrowing one single sum and repaying it over time in scheduled payments. Installment loans can be advantageous over credit cards because they’re more predictable and usually offer lower interest rates.

Check Your Personal Loan Rates

Answer a few questions to see which personal loans you pre-qualify for. It’s quick and easy, and it will not impact your credit score.

Refreshing data.

We found results in California.

In this article

The best personal installment loans can finance the major purchases in your life, from home renovations to that really expensive vet bill after your dog ate a sock. We rated the best installment loan providers using our proprietary SimpleScore methodology to compare interest rates, loan amounts, customer satisfaction, support, and fees.

Why trust The Simple Dollar?

The Simple Dollar keeps personal finance simple to help you make the best decisions for you and your money. We gather the latest information on products and services to help give you our top recommendations. Whether you’re curious about loans or banking, The Simple Dollar has everything you need to keep you up to speed on all things related to personal finance.

We only use the most recent data and information to help us form ratings and recommendations. Our very own SimpleScore helps us fairly evaluate financial products and services. The scores and findings are bound to give you everything you need to make smart investments, purchases and savings decisions to make the most of your dollars.

The 7 best installment loans of 2021

The best installment loans at a glance

Lender APR Terms Loan Amount
LendingClub 10.68%–35.89% 3–5 years $1,000–$40,000
PersonalLoans.com 5.99%–35.99% 90 days–3 years $500–$35,000
Avant 9.95%–35.99% 2–5 years $2,000–$35,000
Prosper 7.95%–35.99% 3–5 years $2,000–$40,000
OneMain 18.00%–35.99% 2–5 years $1,500–$20,000
Best Egg 5.99%–29.99% 3–5 years $2,000–$35,000
LightStream 2.99%–20.49% with out AutoPay 2–12 years $5,000–$100,000

Best online installment loan – LendingClub

LendingClub offers online installment loans that make it easy to make payments from your bank account without prepayment penalties.

APR Range

10.68%–35.89%

Term

36–60 months

Loan Amount

$1K–$40K

SimpleScore

3.2 / 5.0

SimpleScore LendingClub 3.2

Loan Size 5

Customer Satisfaction 3

LendingClub is an online installment loan provider that eases the process of borrowing and paying back installment loans. You’ll be able to borrow up to $40,000 with a low, fixed interest rate. And, best of all, you can make fixed payments on the loan directly from your bank account without worrying about checks or other payment portals. You also won’t face prepayment penalties if you choose to pay your loan off early. However, like other lenders, you’ll have to keep in mind that LendingClub charges an origination fee of 2% to 6% on top of its interest rates. LendingClub also has fairly strict credit requirements and won’t let you apply if your credit score is under 600. If you have a credit score on the higher end, you might be able to get a very competitive rate.

In the News

LendingClub was recently given the green light to acquire Radius Bank by the Office of the Comptroller of Currency (OCC) after leaving the peer-to-peer lending space. LendingClub’s CEO, Scott Sanborn spoke about the deal in a recent press release.

“This is a transformative acquisition for the company and a watershed moment for the industry as we become the only full-spectrum fintech marketplace bank in the U.S.”

The deal is expected to close by the beginning of February 2021.

recent podcast while discussing Avant’s new financial product offerings. Paris would like to focus on refinancing existing auto loans to help customers have better savings. Avant also plans to continue to expand its focus in the credit card industry and consider deposit products.

LightStream has recently received several awards for its personal loans and customer service. The lender recently ranked No. 1 for customer satisfaction by the J.D. Power 2020 U.S. Consumer Lending Satisfaction Study. The award was given based on Lightstream’s loan offerings, terms and management.

personal loan that involves borrowing a lump sum and paying it back in regular payments — aka, installments — over a predetermined period of time, usually several years. Personal loans are a common and versatile type of installment loan, although mortgages, student loans and car loans are all types of installment loans.

Installment loans typically have a fixed interest rate that is determined at the time of application so you’ll always know exactly how much you need to pay back. Common uses of personal installment loans including debt consolidation, home remodeling and medical bills.

[ Read: How to Pay for Home Improvements ]

How installment loans work

When you take out an installment loan, you’ll tell the lender exactly how much you want to borrow and how much time you’d like to pay it back. Based on this information and your personal creditworthiness, the lender will issue you a loan with clearly laid out terms for repayment. You’ll be expected to make set monthly payments for the full duration of the agreed-upon time period until the loan is repaid in full. If you miss payments, you’ll be charged late fees and your credit score may be affected.

Terms

Installment loan terms work similarly to terms on other types of loans. Loan repayment terms specify the amount of time a borrower has to pay back the amount they borrowed plus interest; with personal installment loans, this can be anywhere from a few months to several years. Your loan terms will specify the APR, or the interest rate you’re charged based on your credit score. Late fees and any other types of fees are also considered terms of a loan.

Monthly payments

Although you’ll be given a set period of time to repay an installment loan in the loan’s terms, that doesn’t mean you can just make payments whenever you feel like it. Installment loan providers expect that borrowers will make monthly payments on time and in full every time. This monthly payment will go partially towards the principal balance, or the amount you initially borrowed, and will also cover some of the interest you owe.

Types of installment loans 

There are different types of installment loans based on your needs. Keep in mind that each type of loan comes with its own terms and rates. You may also have a few restrictions and requirements from your lender including what the loan cannot be used for and what’s up for grabs if you don’t repay.

Unsecured personal loans 

Unsecured personal loans are generally easier to get with a good or excellent credit score. Usually, collateral isn’t required by your lender. Rates vary based on your debt-to-income ratio and other credit factors, but you’ll want a rate lower than the current national average of 9.46%. Unsecured personal loans can be used for almost anything except to launch a business, education costs or investments. However, you can use them to consolidate or pay off debt.

Secured personal loans

Secured loans offer the same spending flexibility as unsecured loans, but lenders will often require you to list assets or equity that can be used as collateral. This could be your home, car or other valuable assets. Secured personal loans often have lower interest rates than unsecured loans, and you may get to borrow more. But the lender will have some of your possessions as collateral to retrieve if you don’t pay back the loan.

Mortgages 

Mortgages are the most common type of installment loan used to finance a home, business or property. However, if you don’t repay your mortgage, the lender has the right to take your home. The average interest rate for a 30-year fixed mortgage in 2020 was 3.11%. Before you get a mortgage, lenders usually require you to pay a percentage of the property’s value. The more you can put down, the better. But usually, lenders require at least 3%–5%.

[ More: Should I Make Principal-Only Payments on My Personal Loan? ]

Auto loans

Auto loans are used to purchase cars. Dealerships often work with a number of preferred lenders to get you the best rates based on your credit and other personal finance factors. You can also apply with your preferred lender or bank. Keep in mind that if you don’t pay back your auto loan, the lender has the right to repossess your car. Auto loan rates vary depending on if your car is new or used. By the second quarter of 2020 the average interest rate for a new car was 5.15%, while the rate for a used car was 9.69%.

Alternatives to installment loans

There are a few other low-risk options to get money instead of applying for an installment loan.

  • Get a side gig: A second job can help make extra cash and boost your skill set. See what best fits your schedule and experience to determine what works for you.
  • Help from friends or family: Borrowing from a trusted friend or family member doesn’t have any impact on your credit score. Make sure you work out the details to pay them back— including how much you’re borrowing and when you plan to pay them back in full.
  • Ask about a payment plan: If you need an installment loan for a purchase or to cover another bill it’s best to ask about a payment plan. Most payment plan options offer 0% interest and won’t hurt your credit. The payments can also automatically be drafted from your account for convenience.
  • Use your credit card: If you already have a credit card that can cover your purchase, it may be best to use it instead of applying for a loan. Remember not to exceed your card’s limit and try to keep usage below 30% to prevent it from hurting your score.

[ See: What Credit Score Do You Need for a Personal Loan? ]

Installment loans for bad credit

When you have a low credit score, you might wonder whether you’ll be able to qualify for an installment loan. Some lenders consider applications with bad credit, but there are a few considerations.

First, the interest rates on installment loans can vary significantly. And in general, you’ll pay a higher rate with a low credit score. You can end up paying more than 100% in interest, so it’s important to figure out ahead of time how much the loan is going to cost you.

Installment loans often come with other costs as well. Depending on the type of loan, you can expect to pay an origination fee, as well as late fees if you fail to miss a payment.

[ Read: Best Installment Loans for Bad Credit ]

How to choose the best installment loan for you

  1. Decide how much you need to borrow and for what purpose. Since installment loans are a one-time loan, you don’t want to underestimate the amount you need, but borrowing too much means you’ll have to pay more in interest. Try to get as accurate as you can.
  2. Check your credit. It’s always a good idea to look at your credit report before applying for any type of loan to make sure there aren’t any errors. Incorrect information could bring your credit score down and cause you to end up with less favorable loan terms.
  3. Shop around for loans. Different lenders will offer you varying rates depending on your creditworthiness. For installment loans, make sure you compare rates with a few different types of lenders, such as peer-to-peer networks and lender marketplaces.
  4. Choose a lender. You’ll have to submit a formal application to be approved for a loan, and this process can take anywhere from a couple seconds to several days. Once you’ve been approved, you should have your funds within a few business days.

Check Your Personal Loan Rates

Answer a few questions to see which personal loans you pre-qualify for. It’s quick and easy, and it will not impact your credit score.

Installment loans FAQs

Installment loans are highly versatile and can be used for many purposes. People often use installment loans to buy cars, pay medical bills, consolidate other types of debt or cover unexpected major expenses. Some lenders may ask you what you intend to use your installment loan for.

Your credit score tells lenders how likely you are to pay back your loan. Borrowers with a higher credit score will get better terms, but those with poor credit will have to pay more in interest. This is because lenders expected to get compensated for the amount of risk they take on in issuing you a loan.

There’s no limit to the number of installment loans you can have, although some lenders may discourage this practice by limiting you to a certain number of loans from their particular institution. Keep in mind that every time you apply for a new installment loan, the hard inquiry will show up on your credit report and bring your score down. It’s best to limit the number of loans you have at once.

A no-credit-check loan is a product wherein the lender doesn’t take your credit into account for the application and doesn’t result in a hard inquiry on your credit report. While they might seem like a good idea for someone with poor credit, they can be problematic in many cases. These loans often come in the form of payday loans and have interest rates of nearly 400%.

Installment loans can be an effective tool to help you make a large purchase that you can’t afford out of pocket — often a home or a car. If you’re considering an installment loan, make sure you fully understand the terms of the loan and that the monthly payment easily fits within your budget.

Last editorial update – January 22, 2021 – updated lender information and installment loans buying guide.

We welcome your feedback on this article and would love to hear about your experience with the installment loans we recommend. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com