At some point in your life, you’ve probably had to borrow money for a big purchase, an unexpected expense or to cover some debt. You are not alone. In fact, according to the Government of Canada’s Financial Capability Survey, almost three-quarters of Canadians have some kind of outstanding debt. This is not surprising because there are so many ways to borrow including credit cards, lines of credit, and mortgages.
Of course, traditional installment loans have always been a convenient way to spread the cost of borrowing over a period of time that suits your income and budget. If you’re exploring your options, and want to learn more about installment loans, here’s everything you need to know.
Could an installment loan be right for you?
If you have a specific purpose for a loan and want to pay it off in a set amount of time, an installment loan could be the solution. It has several advantages:
- Consistent repayment amounts, that help you budget for the payments
- At the end of the term, your loan is fully paid off
- You can choose to pay weekly, bi-weekly, semi-monthly, or monthly to match when you get paid
How do installment loans work?
Installment loans are typically used for a specific need, for example, to pay for:
- Outstanding bills
- Emergency repairs to a home or a vehicle
- Debt consolidation
- A wedding or other big event in your life
- A new or used vehicle
- Big-ticket purchases
Each loan comes with a set of terms and conditions, which usually include:
- The principal amount of the loan (the total amount of money to be lent)
- The loan term (the length of time it will take to pay off the debt)
- The interest rate
- Payment options (how frequently the loan payments will be made, such as weekly or monthly)
When you apply for a loan, the lender will consider several aspects of your financial life, such as your income, current debts, and credit score. The big banks and credit unions can be strict in their lending practices, and will likely say “no” if you have high debt or a low credit score. However, that doesn’t mean you’re out of options.
You may still be eligible for an installment loan from an alternative lender that specializes in providing loans for people with low credit scores or no credit history.
How to repay an installment loan
A key advantage of an installment loan is that it comes with a repayment schedule. Over the course of the loan’s term, you make regular payments of the same, fixed amount until the principal and interest are paid off.
This is very different from revolving credit loans, such as lines of credit, which have no repayment schedule and could take many years to pay off. Another advantage of installment loans is that each payment is always the same, so it makes budgeting really easy.
Types of installment loans
The various installment loans available are designed for very different needs, so it always pays to seek advice from a qualified loan specialist on which one is the best choice for you.
The money you borrow using a personal loan can be spent any way you choose and amounts can range from $500 to $50,000. You can apply for a secured loan by offering to put up collateral—something the lender can sell to repay the loan if you default on your payments. You can also have a co-signer agree to share responsibility for the loan in order to secure a better interest rate. Once approved, you can negotiate the terms and conditions to make your loan fit your budget and repayment schedule.
These are specifically designed to help you pay for a vehicle, which then becomes security for the loan. So, rates are often lower than what you’ll get with personal loans. Terms can be as long as seven years. You can get a pre-approval for an auto loan, which allows you to shop only for cars you can afford.
Home equity loans
These are secured against your home, so they typically have lower interest rates than an unsecured loan. They also usually offer higher loan amounts (upwards of $100,000) and repayment terms as long as 20 years, so you can spread the payments out to make them more affordable.
Installment loans: frequently asked questions
How do you manage an installment loan?
They are easy to manage: once you set the terms, you pay the same amount, every pay period, so there are no surprises. To make it even easier, you could set up regular automatic payments from your chequing account so you never miss a payment.
Can an installment loan help your credit score?
Yes! Each on-time payment helps towards bumping up your score little by little.
How can I increase my chances of getting approved for an installment loan?
If your bank or credit union turns you down, consider applying at an alternative lender, such as easyfinancial, where we look at your whole financial picture and there’s no credit history required.
The easyfinancial installment loan
easyfinancial is more than an alternative financial services provider. We offer borrowers lending terms that they’re unlikely to find with their bank or credit union:
- Apply with no credit history
- Personalized rates and payment terms to suit your budget
- Get same-day approval
- Every on-time payment improves your credit score
- You can repay your loan early, with no penalties
Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.