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Installment Loans: What They Are and How They Work

When the need for extra funds goes beyond what a cash advance can provide, an installment loan can be a good solution. Installment loans offer access to larger loan amounts. They also have longer repayment periods than cash advances. This allows borrowers more flexibility in deciding how much they will borrow and how long they will take to pay it back. They can decide on a shorter loan term and make larger payments, or spread smaller payments typically a longer payback period.

Installment loans are not available in all states. In some states, laws dictate the minimum and maximum amounts of money that can be borrowed with an installment loan. Some states also regulate the length of the borrowing period.

How an installment loan works
Here’s a hypothetical example of how an installment loan can work: Betsy is an administrative assistant at a legal firm. A few months ago, she had to undergo emergency surgery and was off work for several weeks. Although Betsy has medical coverage through her employer, she needs to pay a $1,000 deductible toward the expenses associated with her surgery and hospital stay.

The medical bills start to roll in – and by the time all of Betsy’s regular monthly bills are paid, there isn’t enough cash left over to cover the deductible. She is contemplating a withdrawal of money from her 401(k) plan when a co-worker suggests an installment loan. Betsy does her homework online, finds a reputable lender and applies for a $1,000 installment loan. With a higher loan limit and a longer repayment term than a cash advance, an installment loan provides Betsy with the funds she needs. Her six-month loan repayment period means that her twice-monthly payments are small enough to be manageable.

What an installment loan costs
The cost of an installment loan to the borrower consists of interest charges and any applicable fees. Fees and charges should be explained in the lender’s loan agreement, along with a notification that late fees that may be applied if the borrower doesn’t make payments on time. The lender should express all charges in a dollar amount as well as an annual percentage rate (APR), which is required by U.S. law.

Qualifying for an installment loan
In states where installment loans are available, lenders typically consider income and credit history to determine an applicant’s eligibility and how much they may be permitted to borrow. The minimum and maximum loan amount available may also be based on laws in the state where the applicant lives. Applicants must complete a loan application and submit it to the lender along with some additional information – such as identification, verification of employment and income, and checking account information. Depending on the lender, other requirements may apply.

Choosing a reputable lender
When considering an installment loan, it’s very important to choose a reputable installment loan provider. Applicants should choose a lender that provides full disclosure of rate information, complies with state laws, and provides easy-to-understand details about its lending practices. By choosing a lender that’s a member of the Community Financial Services Association of America (CFSA), borrowers can ensure they are doing business with lenders who have pledged to follow fair and transparent lending practices.