For many Americans, bills can pile up faster than they can pay them. And all the changes over the past year have caused many budgets to fail. Regardless of financial situations, many people experience times when their goals—and their debts—exceed the amount of cash on hand. These are the times when people consider using installment loan direct lenders.
People need access to affordable loans that can put them back on track. And more importantly, they need to know how to find the best installment loan and lender for them.
When choosing an installment loan, having options usually isn’t a problem; there are thousands of direct lenders with tons of installment loans that can cover just about any purchase. And when it comes to financing your future, it’s essential to make a decision that you can live with. This is why the only loan you want is one that you can pay back on time.
One of the most manageable ways to borrow money is through a direct installment loan. In this article, we’ll explore some of the essential facts and features of installment loans, the direct lenders that offer them, and how you can avoid some of the common pitfalls and missteps that happen when installment loans aren’t taken seriously.
How Your Credit Score Affects Direct Installment Loans
Most installment loans have a fixed interest rate; your credit score can significantly affect that interest rate. Many people know that their credit score determines many financial decisions, yet many don’t know what that score means or where it comes from.
Your credit score is an overall measure of your creditworthiness. It is a number that tells potential direct lenders and creditors how likely you are to pay back the money you borrow from them. With every dollar that a direct lender disburses, they intend to get it back with interest added. So, if you can’t pay back a loan, they lose both the loan amount given to you and the projected earnings on the loan’s interest and fees. This is why your score matters so much to any business that works with financing and installment plans.
Five major factors determine your credit score:
Payment History (35%)
This record of the payments that you make to the people and businesses you owe is the most critical piece of information in your credit report. For people with not-so-good credit, this factor alone can make or break any installment loan opportunity. Be sure to pay your bills on time, always. And if you can’t, talk to your creditors; sometimes that communication can stop them from “dinging” an otherwise good payment history with a delinquent account report.
Credit Utilization Ratio (30%)
Your credit utilization ratio measures the rate at which you are using the available credit you have. Let’s say you have a $100 balance on a credit card with a $500 limit. Your credit ratio would be 20%. Ideally, a good credit score reflects a credit utilization ratio of no more than 30%. Keeping this ratio in check will show creditors that you can use your credit wisely and in moderation.
Credit History (15%)
Credit history is simply the record of the creditors that you have or have had in the past. A long credit history that shows accounts in good standing can illustrate a responsible use of credit over a long period, which is a good indicator of your creditworthiness.
New Credit (10%)
If you open several new credit cards or other debt accounts quickly, this could signal that you are in some financial trouble that could make it difficult to repay a creditor’s loan. When you are looking to finance a big purchase, try to avoid opening any new accounts that could raise a flag during a credit check.
Credit Mix (10%)
Your credit mix refers to the different types of credit accounts you have now or in the past. Creditors look at this to see how well you manage your accounts, but the other factors are more important.
The credit bureaus review these five financial factors. Credit bureaus are data collection agencies that provide consumer information to creditors, businesses, and the public. The three major credit bureaus in the United States are Experian, Equifax, and TransUnion. With this data (and a lot of math), they calculate a three-digit number called a FICO Score ranging from 300-850. Here’s what your score means:
- 300–499 Very Poor/Bad
- 500–600 Poor/Bad
- 601–660 Fair
- 661–780 Good
- 781–850 Excellent
The higher your credit score, the better your chances are of getting a direct installment loan with great rates and manageable repayment terms.
What Is a Direct Loan?
This is a loan agreement that exists between a direct lender and a borrower. A direct lender would be an entity like a bank, credit union, or the federal government.
It’s different than an indirect loan, which involves a third party whose primary job is to connect the borrower and lender. This third party is usually a broker that collects a borrower’s information and does the legwork of finding the most likely lenders to approve a loan for them. When that loan is approved, the third party receives compensation from the direct lender—typically a percentage of the loan amount—rolled into the loan’s fees and interest.
With all this considered, a direct installment loan will require a little more work on the borrower’s end, but the effort will save them money depending on the loan.
Direct Installment Loans
A direct installment loan is a loan you repay through a series of scheduled payments, known as installments. The terms of any immediate installment loan detail the size and frequency of each installment payment. Typically, you pay off direct installment loans through equal portions of the loan amount (principal) and the loan’s fees and interest. Installment payments are due in monthly, weekly, or quarterly installments.
By the end of the loan term, you will pay back all of the principal and interest. There are direct loans that charge penalties for paying your balance off before the loan term has ended.
Direct loans are suitable for people with bad credit; by removing the element of the third party, borrowers can avoid added loan fees and raise their chances of finding a direct lender that works with lower-than-average credit scores.
Some of the more common types of installment loans include:
This is a loan for buying a car. Typically, auto loans are low-risk for the lender since the vehicle acts as collateral.
An auto loan can be direct or indirect. In a direct auto loan, the borrower applies for a loan from their bank and then goes to the car dealer to purchase. In an indirect auto loan, the car dealership searches for a lender that can offer you a loan based on the car you want and the credit score.
Mortgages are secured, direct loans that are used to purchase a home or real estate. The loan can come with a fixed rate, or adjustable-rate mortgages (ARMs) are essentially subject to the highs and lows of the financial markets.
Like auto loans, mortgages can also be indirect, particularly for potential homeowners with bad credit. With assistance from the Federal Housing Authority (FHA), people can secure low-interest, fixed-rate mortgages as long as they purchase mortgage insurance from the FHA.
Once the homeowner repays a certain amount of the loan, they can remove the necessary insurance. The federal government also guarantees these mortgages, which means that if the borrower defaults on the mortgage, the lender doesn’t incur a financial loss.
These are used for college tuition and expenses.
They’re among the most flexible installment loans available. Already offered with interest rates lower than most loans, a borrower can adjust their terms and defer repayments while still in school. Moreover, these loans can also be restructured throughout their life to allow for the borrower to pay back what they can, when they can.
Although student loans are available through private loan lenders, the federal government issued the vast majority of student loans. These loans are given in subsidized and unsubsidized forms, which differ in terms of loan limits and interest. Like mortgages backed by the FHA, federal student loans are backed by the United States government.
Peer-to-Peer (P2P) Loans
Conventional loans from financial institutions like banks and credit unions, although readily available, can be restricted to borrowers with good credit. With Peer-to-Peer lending, borrowers are connected with investors or investment groups that are looking to provide financing to people who need money.
P2P lending is a relatively new service in the finance industry that can provide an alternative route for people with bad credit to get reasonable interest rates on loans. Instead of applying for a conventional loan with a bank, a potential P2P borrower is connected to a network of lenders who review their applications and make a decision.
Instead of focusing on credit scores and past financial habits, P2P lenders tend to look at numbers that reflect your ability to repay the loan, like your income and payment history. As investors looking to maximize profits, they are more concerned with following the ups and downs of consumer behaviors and financial markets. That means that Peer-to-Peer lenders are more concerned about why you want the loan and if you will be able to pay them back.
The popularity and availability of P2P loans are growing because they can provide people who have bad credit with an opportunity to secure a loan that they can repay in installments, instead of the higher interest rates and strict loan terms that come with many bad credit lending options.
Friends and Family Loan
It’s not always easy to ask for a bit of help, but if your credit isn’t stellar, a friend or a family member may be able to help you. The people close to you will have an intimate knowledge of you and the financial trouble you’re in and may be able to provide a loan with little to no interest that you can repay on a schedule that works for you. This could be a great way to get a loan without enduring the application process and credit check that comes with any conventional loan process.
Because money can be a sensitive issue, any loan you get from a family member or friend should be documented in an agreement and signed by both parties. That way, everyone can be aware of what’s expected of them. No matter your financial situation, you will want to avoid creating any stresses and strains on the relationships in your life.
Payday Loans and Cash Advances
Thousands of payday loan lenders are available in the United States with good reason: They are possibly the most accessible loan that a person can secure. Many payday loans take moments to approve, as they only require current employment and an active bank account. And with online payday loans available, a borrower can apply for a loan and have the funds delivered via direct deposit all within the same day.
Payday loans are usually easy to get because they aren’t like traditional bank loans. A payday loan is a cash advance backed by the money that a borrower is expected to earn before their next payday.
A borrower must apply with a lending company to get a payday loan and write a check for the amount of money they want to borrow, along with any interest and service fees charged by the lender. You may also be able to set up an automatic withdrawal from your bank account. If the lender approves the loan, then they send the loan amount to the borrower. At the end of the loan term (usually around 14 days), the lender cashes the borrower’s check or withdraws the funds from the borrower’s account.
How Do They Work?
A payday loan can be an ideal short-term solution to a short-term cash-flow problem. They can bridge the gap between pay periods, giving the borrower the spending power they need when they need it. However, the problem that people experience with payday loans lies in the terms and fees. People who tend to get payday loans already live with little-to-no extra money for new expenses. So when these loans come due, borrowers often make tough decisions between repaying a loan or covering their rent, food, utilities, and other basic needs.
This dilemma is probably why well over forty percent of people who get these loans end up defaulting. Payday lenders remedy this problem by rolling over unpaid balances into new loans, complete with another round of interest and processing fees. Even a small loan of just $500 could balloon to thousands in just a matter of weeks.
Payday loans have received a lot of negative attention, thanks to the predatory practices of many payday lenders who willingly take on customers that cannot repay their loans on time while concealing important information about their loan terms and conditions. To combat this issue, government agencies like the Consumer Financial Protection Bureau are enacting and enforcing tighter regulations on the industry to promote more transparency in the borrower/lender relationship.
Payday loans are speedy solutions to a cash shortage, but if you don’t know what you’re getting into, your debt can rise even faster. Do your homework.
Installment Loans vs. Revolving Credit
In a direct installment loan, the borrower receives the loan amount in one lump sum. Revolving credit allows a borrower to use the funds that they need, when and how they need it.
If a person receives a $1000 loan, they will need to repay the entire $1000. However, if a person only spends $500 on a credit line, they only need to repay that $500. Moreover, if you pay back the $500 then the full amount becomes available to you again. If it is not repaid, the balance revolves—or is carried over—to the next billing cycle.
While this seems like a less expensive way to borrow, the actual cost of revolving credit is in its convenience. Revolving credit lines have additional fees that installment loans don’t carry. These may include overdraft fees, annual percentage rates (APRs), and other service charges that vary from provider to provider.
The ease of spending on a line of credit can cause people to spend more than they can afford. This means that unpaid balances will continue accruing interest and penalties. This is where the most damage to your credit can come from. A near-maxed credit line can severely damage the second most important credit score factor: Your credit utilization (see above).
Drawing on revolving credit can certainly provide you with some freedom. However, for the most stable financial assistance, a direct installment loan is the best option.
The variety and safety of installment loans make them an excellent way to get the money you need. But, it is essential to pick the lender that is right for you. Research your options carefully. Before you enter into any loan agreement, dust off that magnifying glass and read all the fine print. And above all, remember to keep up your end of the loan agreement make your payments. If you treat your installment loan well, it can be the best solution for your debt.