Americans have access to multiple forms of borrowing. Almost everyone has credit cards these days, but installment loans are also worth considering. They may be used for large purchases like a house or a vehicle. Both products have their own pros and cons.
Today, you may request a loan from the comfort of your home. Installment loans in Texas from Cashspotusa accommodate very different needs. They may allow you to cover education costs, to buy a car, etc. The borrower receives a fixed schedule of payments with a fixed interest rate. Discover when installment loans are better than any lines of credit.
How These Loans Work
Such loans provide you with a lump sum that you subsequently pay back over a fixed period of time. The lender provides an amortization table that details the process of paying off the principal (the amount borrowed) and the interest over the agreed term.
The interest rate remains unchanged throughout the entire period. There may be additional charges like origination fees for personal loans or closing costs for the mortgage. You know exactly how many months you need to fulfill your obligations. At first glance, credit cards are similar: you know your interest rate and the date of each monthly payment. However, there are a few important distinctions.
Advantages of Credit Cards
With a credit card, you always have access to borrowing. It is a renewable lending scheme that allows you to use the bank’s money within your credit limit. It boosts your purchasing power whenever you need it.
You can also earn rewards as part of different loyalty programs. For instance, your card may allow you to accumulate miles and use them to buy plane tickets. The issuing bank may have different partners that provide discounts and special offers to its clients. Of course, an installment loan does not entitle you to such extra benefits.
Credit cards are often indispensable for travelers. For example, some hotels place a hold on the guest’s credit or debit card to secure a booking. When these are your debit funds, the process may cause inconvenience. Until you check in a hotel, the amount is inaccessible.
Still, the easy accessibility of borrowed capital makes it easier to overspend. Loyalty offers may also cause you to buy unnecessary products and services. After all, the interest rate may render some benefits negligible. It is much better to have a debit card with the same loyalty offers. A budgeting app like Mint can help you to keep spending under control and save more.
Advantages of Installment Loans
So, why is this better than a credit card? With any line of credit, you retain the opportunity to borrow again. This is exactly what causes so many people to end up in the vicious cycle of debt. With a credit card, they always have instant access to more capital, so it is tempting to spend more than necessary.
No Opportunity to Overspend
Humans feel more comfortable swiping a card than parting with real cash. Credit cards have an important psychological effect – their holders feel tempted to overspend. An installment loan is a one-time arrangement that protects you from unreasonable borrowing.
With a card, you have a different size of payment all the time, as it changes in accordance with your balance. Borrowers with fixed conditions know exactly how much they will pay throughout the term of the agreement. Therefore, budgeting is easier, and there are no surprises.
Cards allow you to make minimum payments, but these mostly cover the interest. Therefore, borrowers that find themselves in dire straits notice that their payments have little effect on the size of their debt.
Each payment within an installment loan system covers a portion of interest and a portion of the principal. Usually, the first payments include the most interest, but its share gradually decreases. Amortization tables provided by lenders give a precise breakdown, so you know exactly how effective your payments are.
How to Qualify for Installment Loans
Depending on the lender, the conditions may be more stringent or lax. Generally, creditors with the softest requirements also charge the highest interest. Therefore, there is always a tradeoff between accessibility and low cost. Banks are known to have the most meticulous scoring systems. Here are the most basic conditions that are used by internet-based lenders:
- a steady source of income,
- a valid checking account,
- a working phone number, and
- a valid ID.
Today, you can submit an application online and upload all the required documents. The lender will use their internal scoring system to evaluate your reliability as a borrower. Each of the requirements has a numerical value assigned to it.
If you receive approval, the lender contacts you to inform you about the available conditions. Please note that the maximum amount you can borrow with such types as a payday loan may be capped by your state. It is crucial to read every paragraph in your agreement before signing it.
Consequences of Non-Payment
If you experience problems with paying on time, let your lender know about it. The company may agree to change the conditions of your agreement – for example, extend the term to reduce the monthly payment. Whatever happens, negotiate. Loan agreements usually include penalties for non-payment, and these will be mounting continuously until you get back on track.
What to Do With Bad Credit History
If your credit records are far from perfect, big lenders may be reluctant to accept you as their applicant. Poor credit scores can result from reckless borrowing behavior, financial force majeure, or mistakes in the system. Every citizen is entitled to one free credit report annually from each of the three report bureaus in the country.
If you notice any inconsistencies in the information, contact the agency and the institutions involved. Do not just express your frustration – collect evidence. Submit copies of any documents that may prove that an error exists. As a rule, the organization will investigate the matter within 30 days.
If the low rating is the consequence of your own behavior, be ready for a slow recovery. Find lenders which still agree to lend to you, even if the conditions are not fantastic (which is usually the case). You can take out modest amounts and pay them back in time. This way, your history will improve over time. However, make sure the lender is officially licensed. Afterward, you will qualify for larger installment loans again.
As you can see, installment loans have important advantages over credit cards. Shopping with borrowed capital is not a good idea. Responsible borrowers budget carefully and take out loans which they really need. When it is time to buy a car or home, installment loans are often indispensable. Despite their fixed-term nature, you can still repay early and save on costs.
Naturally, borrowing is never free. Credit cards require caution, while installment loans offer fixed conditions with no opportunity to get into deeper debt. Budget wisely and contact the lender if you have problems with repayment. You may also get rid of the debt more quickly. The more you pay each month – the faster your balance reaches zero as it happens with credit cards.