30 Aug The 3 Key Components of an Installment Loan
The 3 Key Components of an Installment Loan
We have all heard the phrase “you can do better”, but what if we don’t know what better is or looks like? Well this phrase does apply to your financial life and we are here to help you understand what “better” is in the context of a loan.
When taking out a payday or short term loan, people often do so out of an immediate need. Often times it is at the last minute and you tend to be rushed in your decision making process. Here at Credit Fair-E, we decided to simplify the 3 most important things to look at when deciding on a loan.
Take a breath, relax. Take 3 minutes to evaluate your next loan decision, it may save you hundreds in unecessary interest and fees.
The term or length of the installment loan determines a lot about the loan. Not only does it determine how long you will be paying off the loan, but it also directly affects your payment.
If you choose to go with a lender with only a 30 day term (as your typical payday loan would have it) you are required to only payback the amount borrowed, plus any interest and fees in a very short period of time. This is a big reason why the average payday loan user reborrowers close to 8 times before finally paying it back (incurring additional fees each time).
Consider looking at payday loan alternatives or in other words, a fair installment loan. Something with a term closer to 6-12 months. This allows you the financial flexiblity to not overburden yourself with loan payments, but still pay it off early should you choose.
2. Rate and APR
This is probably the most obvious of the 3. Obviously the rate or interest rate, is a big part cost of the loan. Common sense typically wins here and you’re often safe to simply shoot for the lowest. After all, why pay more for the same money?
Don’t forget to check the APR though. The APR or Annual Percentage Rate is the total amount of finance charges (both fees and interest rate) expressed as a annual rate. This should offer you a fair point of comparison between loans.
Be cautious with lenders who lure you in with low advertised rates, but then take your on the back end by charging application fees or other arbitrary finance charges. This can be easy to spot when you see someone charging a 50% rate but a 120% APR. Effectively what this means, is that even though you’re only paying a 50% interest rate, you are essentially paying the equivalent of a 120% rate due to fees and charges.
As we mentioned above, fees can often be the sneakiest of the 3. Sometimes lenders won’t even charge an interest rate, rather a set of fees to be the equivalent of a rate.
These can be particularly costly with balloon payments. Think about it. A financial emergency arises and you need to borrow money to get you through. You go and take out your typical payday loan, without looking at alternatives. Around comes your next payday, and the loan obligation you took out last week. Now you need to payback your loan, PLUS let’s say a $75 fee all at one time. Can you really afford to put the bulk of your paycheck, plus a 75$ fee towards this loan? Probably not.
That is why payday lenders thrive on fees. In that scenario, you may need to take out another, equivalent loan to cover the full amount. Well, thats another 75$ fee. So our next payday loan comes around, now you need to pay an additional $150 plus your original amount borrowed to get the loan payed off. You’re probably starting to why the average borrower will roll this over several times before its paid for.
Be sure to take note of the connections between the items above. In almost every scenario, one will impact another in some way. Particularly with Fees and APR/Rate. The next time a financial emergency arrises, take a breath and make sure the terms fit your needs.
There are many lenders out there and therefore, many sources of the short term cash you need to solve your emergency. Be cautious though, as most lenders will not offer you a fair installment loan. Look for companies like Credit Fair-E who offer a dedicated payday alternative loan, to help you through your time of need.
At the very least, look for a fair installment loan to ensure that the solution to your financial emergency – doesn’t become your next financial emergency…
Learn more about why Credit Fair-E is different by watching a short video here: https://youtu.be/JEZdRGjSRhQ