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Pros and Cons of Installment Loans

Installment loans offer fixed conditions. Unlike credit cards, they do not allow repeated borrowing, but may be paid off early. Here is a look at their pros and cons.

These loans are ideal for borrowers who want to know exactly how much they will pay every month. The best installment loans in Texas may help you cover different expenses, from buying a car to paying for education. First, let’s look at the benefits.

1. Fixed Monthly Payments

Borrowers know in advance how much they need to pay monthly. This makes financial planning easier. You can borrow to make a big purchase like a house or a vehicle and make small payments that cover both the principal and the interest. For many people, installment loans are the only option, as they do not have enough cash set aside.

Every payment reduces the size of your debt, and the loan balance reaches zero by the end of the term. You know exactly how many months the term covers, and how the repayment works, as lenders provide amortization tables. Each payment is broken down, so you can see how the share of interest gradually diminishes.

2. Early Repayment

Although the schedule is fixed, you have an opportunity to pay off your debt more quickly. This is the most preferable scenario, as you will end up paying less interest. The only inconvenience is that unlike a credit card, this system requires that you contact your lender every time you want to make a large payment. Otherwise, they will still charge the standard amount. As a rule, there is no penalty for prepayment.

Disadvantage: One-Time Only

These loans do not allow you to continue borrowing, which sets them apart from lines of credit. On the one hand, this prevents borrowers from getting into more debt. On the other hand, you may still need access to additional funding in emergency situations. With a credit card or a line of credit, you may borrow money repeatedly.

Disadvantage: Possible Fees

Some lenders will also charge special fees. Home loans may include closing costs, while the origination fee for a personal loan may add between 1 and 8% of the borrowed amount. The most expensive form is payday loans. The interest may reach 400% over a 12-month period.

Why You Need to Be Careful

Despite the convenience, installment loans are obligations that must be met. Failure to make payments may result in serious consequences. Even borrowers who think far ahead and budget carefully are not protected against force majeure.

Those who default on their loans may lose their collateral, and they are sure to see their credit score fall. This may render them unable to take out more loans because they no longer qualify for them. Avoid maxing out your debt-to-income ratio. Installment loans are handy, but they are not as flexible as credit cards or other lines of credit.