How Does an Installment Loan Work?

May 7th 2016
An installment loan is the most popular type of loan because of the flexibility it offers the borrower and the profit it offers the lender. These loans are available from a large number of lenders for diverse reasons that include buying a car, buying a home and starting a business. Anyone with the necessary credentials may receive an installment loan, which must then be paid back in regular installments over a pre-set timeframe. 
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Your lending agreement will outline how often you are required to make repayments to the lender and what the minimum payment is. Installment loans are repaid at an agreed-upon interest rate, so the longer you take to repay them, the higher the total cost to you. Usually, payments are arranged on a monthly or bi-monthly basis. Basic installment loans are the backbone of today's lending industry, and they come in many different forms.

What Can an Installment Loan be Used For?

The purpose of a loan must be specified by the lender and agreed upon by the borrower before funds will be transferred. In some cases, personal installment loans may be granted to a borrower without the purpose being clarified. This is usually based on a good credit rating or secured collateral. Usually, there are four types of installment loans: personal secured loans, personal unsecured loans, home mortgages and car loans. 
Personal loans may be used however the borrower wishes, so long as the payments are made in the correct amount at the correct time. As for specified car or home loans, the money must be used as agreed by the borrower and the lender. 

How Much Is an Installment Loan Worth to the Borrower?

Installment loans may be as low as $500 or as high as several hundred thousand dollars; the amount depends on the borrower and the lender. Moreover, the amount depends on what the borrower actually needs it for. Frivolous, low-value loans are not usually approved by banks, unless the potential borrower has a great credit history. Banks are much more willing to take the risk in lending money when the amount is high and the borrower has a track record of making repayments on time.
Assuming that the borrower has a good credit rating, steady income and possibly something valuable to claim as collateral -- a vehicle, a house or a savings account -- he or she may borrow as much money as is deemed appropriate for their wage range. Of course, the final word on the amount always comes from the lender.
Personal loans are generally smaller than home mortgages, simply because the bank or lender can always use the latter as collateral if the borrower fails to make regular payments.

Who Owns What I Buy with an Installment Loan?

If you enter into a mortgage agreement or a car loan, your home or car is technically owned by the money lender until you completely pay off the loan. If you fail to make regular payments or are continually late with payments, the bank or money lender can repossess the house or vehicle. It will then be sold to make up the money that you failed to repay the lender. Although for tax purposes you are considered the true owner of your house or car before the loan repayment period has ended, this is not the case if you go bankrupt or miss payments. 
Until you make your final repayment to the money lender, your car or home is owned by that lender. The only time this is not the case is with an unsecured personal installment loan, which may be used for anything you choose. 
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