How Installment Loans Work and the Benefits They Offer
Are you thinking about borrowing some money? If so, what is the purpose of the money? Some people borrow money to buy a home or a car, while others borrow money to consolidate debts. You can also borrow money to finance a home improvement project, take a vacation, or pay for an expensive item you want to buy.
One option you have for borrowing money is an installment loan. If you do not know what this type of loan is, here is an explanation of what an installment loan is and the benefits it offers.
The Basic Terms of an Installment Loan
An installment loan is one of the most popular ways people borrow and repay money. An installment loan has several components, and here are the main ones:
- Principal balance – The amount you borrow
- Interest rate – The rate you pay for interest charges on the loan
- Duration – The length of the loan
When you borrow money through an installment loan, these are the three main things you must know. These terms determine your payment amount and other important factors relating to your credit line.
How It Works
The principal balance is the amount you borrow and must repay. For example, if you need $10,000 and borrow this amount, this becomes the balance you owe. Based on the interest rate and duration of the loan, your lender determines your payment amount.
The payment amount is the same for the length of the loan. If you take a three-year loan, you will make 36 equal payments. The lender applies each payment to your principal balance and keeps a portion of your payment to cover the interest charges. Each month, your principal balance decreases after you make a payment. When you make the last payment, your principal balance goes down to $0.
The Benefits It Offers
There are two significant benefits of installment loans. One, they offer a way to pay for something over time. Your loan might last for just one year, or it could last for 30 years. Two, you know the exact date of when you will pay off the loan before you even take it. If it is a five-year loan, you will see that it will be paid off five years from today.
Now that you understand how an installment loan works, you might be ready to apply for one. To do so, call a lender like Ardmore Finance to find out what you must do to start the process.