You might experience times in your life when your bills exceed the cash you have in your bank account. You might also have times when you need to buy something, such as a car, but do not have the funds to pay for it outright. To get through these times, you might decide to take an installment loan. Before you do this, though, you might have some questions about these loan types. What are they, and how do they work? Here are the main answers you need to know before borrowing money through one.
The Basic Principles of Installment Loans
The unique aspect of an installment loan is that you repay it over time through a series of equal payments. You initially borrow the money from the lender, and this amount is called the principal balance. For example, if you borrow $5,000, the principal balance is $5,000. If you borrow the money for two years, you must make 24 equal payments, which repay the principal balance over time. When you make the very last payment, you pay off the loan in full, and you owe nothing more. Many lenders let you pay extra each month if you have the money to use for this purpose. If you pay extra each month, you might eliminate some of your payments. For example, you might cut it down from 24 payments to only 20.
How Principal and Interest Work with Installment Loans
The second thing to understand relates to the interest you pay with the loan. When you borrow the money, the lender will tell you several vital details, including the interest rate. The interest is the money you pay the lender for issuing you the loan, while the principal balance is the amount you borrow. Each month, the lender will divide your payments between principal and interest. At first, you might pay a lot of interest, but the interest amount will gradually decrease as you pay down the principal balance. This occurs primarily because the lender bases the interest on your principal balance.
Now that you understand some basic things about installment loans, you might want to apply for one. An installment loan is a great option if you need to borrow money that you cannot repay in one lump sum. You can contact a lender that offers these loans like Ardmore Finance if you would like to learn more about the application process.
Share8 December 2021
When it comes to borrowing cash for a new house or a nice car, how much money do you really need? Although you might be tempted to mortgage yourself to the brim or borrow a little more than you should, the fact of the matter is that everyone has financial limits. My blog discusses the impact of borrowing more than you need, so that you can make smarter decisions with your money. In addition to keeping you out of trouble, this valuable information might also improve your quality of life and protect your financial future. You never know, it could make all the difference.
