The rise of financial technologies has driven the growth of online installment loans.
Reports indicate that the volume of online installment loans issued in the United States has grown by more than 600% since 2014, and some of this surge can be attributed to the convenience of applying and getting approved online, which avoids uncomfortable and often time-consuming visits to local bank branches or storefronts.
Prospective borrowers can browse the web to find the most suitable online installment loans based on their financial needs. The process of getting approved typically takes only a few hours since online lenders have expedited their approval process by incorporating elements such as artificial intelligence and 24/7 customer support.
How Do Online Installment Loans Work?
An installment loan provides borrowers with a certain amount of money that is repaid through a series of installments. These payments are usually made each month (depending on the type of loan), and they contain a portion of the debt’s principal along with an interest charge.
In the past, borrowers had to visit a local financial institution or business to get an installment loan. Nowadays, fintech (financial technologies) businesses have combined online platforms and innovative software to hasten the application and approval process. Borrowers can now save time and effort by applying for one by using their computers or mobile phones.
In most cases, the process has been simplified to four basic steps, including:
- Application: The application process usually involves visiting the lender’s website and filling out a few forms with personal, credit, and financial information that lenders use to evaluate the borrower’s creditworthiness. This process often takes a few minutes.
- Approval: After completing the application process, a team is usually standing by to evaluate and respond to each application. In some cases, fintech companies may even use artificial intelligence to decide if a loan should be approved based on an algorithm. The approval process of an online installment loan may take as little as one or two hours or up to three days, depending on the lender.
- Consent: Once the loan is approved, the borrower must sign a contract (usually a digital one) and send it back to the company. This contract contains important information about the relationship between the borrower and lender, and it also establishes the loan’s terms and conditions, including the amount of each installment, due dates, any penalties or fees, and other important matters about the loan.
- Disbursement: After the company receives the signed contract, the funds are deposited into the borrower’s bank account within one or two business days.
Most Common Types Online Installment Loans
While many types of installment loans exist, such as mortgages, auto loans, and student loans, most online installment loans available nowadays are personal loans (also known as consumer loans). According to a recent report from TransUnion, one of the three nationwide credit reporting agencies in the United States, 38% of all unsecured personal loans issued in the U.S. were made by a fintech company.
By the end of 2019, the total balance of personal loans in the United States was approximately $305 billion, and the average debt per borrower was close to $8,400. Additionally, at least 20% of the loans were used to fund large purchases, and 26% were employed for debt consolidation purposes.
It is also important to note that 30% of the loans were used for purposes that borrowers did not disclose in the surveys, which is normal since personal loans don’t necessarily require the borrower to explain how the funds will be used.
Finally, these are some of the most common types of online personal installment loans:
- Debt Consolidation Loans: Debt consolidation loans are used by borrowers to place all of their debts into one single credit instrument. This allows them to free up the credit limits of the other accounts, and they may also get a lower APR on the debt consolidation loan compared to the APR of the previous accounts.
- Title Loans: A title loan involves pledging an asset, such as a car title, as collateral to back the installment loan. This reduces the risk associated with the loan from the lender’s perspective. If the borrower defaults on their financial obligations, the lender can repossess the asset to cover the loan’s outstanding balance.
- Unsecured Installment Loans: Unsecured installment loans rely solely on the borrower’s promise to repay the loan on time. They are issued by lenders to borrowers with an excellent credit history and sufficient payment capacity.
- Secured Installment Loans: A secured loan requires collateral to be approved, and the interest rate associated with these loans tends to be, under normal circumstances, lower than that of an unsecured loan because lenders can seize the asset if the borrower defaults the loan.
- Bad Credit Loans: Payday loans and cash advances are both forms of bad credit loans. They were created by online lenders to assist borrowers with challenging credit situations.
Usual Requirements to Apply for an Online Installment Loan
A lender’s minimum criteria to consider an applicant suitable for an online installment loan varies between lenders and states, depending on their specific regulatory framework. Nevertheless, most lenders share some of the following requirements:
- The applicant must be 18 years old or older.
- The applicant must have an active bank account that’s at least six months old.
- The applicant must provide evidence of a reliable source of income, such as a salary or a pension.
In addition, the actual requirements typically vary between loans. For example, a secured loan may require the collateral to be appraised by a professional, while a co-signed loan may require an application from the co-signer as well.
Finally, there are certain minimum credit requirements to get approved for an online installment loan. However, compared to the requirements established by traditional lenders, online lenders tend to be more flexible in providing alternatives for individuals with low credit scores.
Benefits and Disadvantages of Online Installment Loans
Same as other types of loans, installment loans have their own pros and cons, such as:
- Borrowers can apply for an online installment loan in a matter of minutes through the lender’s website.
- There’s no need to visit a storefront or a branch of a financial institution to apply for one.
- The approval process is often much faster than traditional lenders.
- Online lenders usually set less strict minimum criteria.
- Online installment loans don’t necessarily require the borrower to disclose how the funds will be used.
- After approval, the funds from the loan are often transferred to the borrower’s bank account within a few hours.
- The maximum amount that can be approved through an online installment loan is usually lower compared to traditional loans.
- The borrowing cost of online installment loans tends to be higher due to their higher risk.
How Much Can a Borrower Get from an Online Installment Loan?
The actual amount that a borrower can get from an online installment loan varies depending on various elements, such as:
- Type of loan: In most cases, the amount that a borrower can get from an unsecured installment loan will be lower than a secured one. The collateral reduces the risk associated with the loan, and the loan amount tends to be tied to the asset’s value.
- State of residence: Certain states have imposed maximum limits on the amount that can be extended to a borrower through an installment loan.
- Income: The income level of a borrower usually has some influence on the amount that they can get from an online installment loan.
- Credit situation: While online installment loans tend to be more flexible in their criteria when it comes to credit scores, borrowers with high scores are usually approved for higher amounts, especially for unsecured loans.
- Payment capacity: Some lenders evaluate a borrower’s financial situation, including their current debt commitments, to make sure the borrower has enough money to meet the monthly installment associated with the loan.
The rise of financial technologies has facilitated the process of applying and getting approved for an installment loan. Nowadays, fintech companies are providing borrowers with the possibility of applying for online installment loans in a matter of minutes through online platforms, and they have also improved approval speeds with advanced software and dedicated customer support teams.
There are many types of online installment loans, and borrowers can choose which one fits their financial situation the best. The minimum criteria required is usually more flexible than traditional lenders, and the amount they can get approved for varies depending on several factors, such as their state of residence or their credit situation.