What To Know About Interest Rates And Fees For Installment Loans

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The interest rates and fees for installment loans can be different for each lender that you visit. While they may have an advertised rate, it's likely that you will be offered a rate that is different due to multiple factors. It helps to understand what determines the rate and fees for an installment loan to know how they work.

Collateral And Credit Score Influences

An installment loan works by providing you with the lump sum of money you are requesting all at once and then paying that money back over time. Therefore, there is a risk that the lender is taking on by giving you the entire lump sum. While the hope is that you pay the money back with interest, there is always a chance that you do not pay the loan back at all. 

In situations like a home mortgage, the house itself is used as the collateral. If you do not pay back the mortgage, the lender can always take back the home to recover the money that they lost. However, an installment loan for personal use doesn't have this type of collateral. The only way to get the money back is to go through the legal system.

Since the lender doesn't have collateral, the best way to determine how risky you will be as a borrower is your personal credit score. If your credit score is high, you will be seen as being less risky and may receive a lower interest rate. If you have a low credit score, you will receive a higher interest rate due to being viewed as a higher risk.

Fee Influences

Installment loans are competing against other kinds of loans for your business and can be more competitive in some ways. Instead of just looking at the interest rate, you must look at the fees involved to originate the loan with your lender. You may be surprised that a slightly lower interest rate is a worse deal than a higher rate from another lender due to the fees involved to originate the loan.

It is worth figuring out the total cost of the loan when you factor in interest and fees, and then compare that to your other options. You'll find that an installment loan is often a better deal than simply using a credit card, but you still need to factor the origination fee into the total cost of the loan to compare apples to apples. 

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10 July 2019

Understanding Loan Terms And Financing

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