There are many myths and misconceptions about installment loans. Let’s address some of the most common myths about installment loans before sharing the truth about this financial product.
We’ll also discuss why some of these misconceptions are so common.
You Have to Go to a Payday Lender
While payday lenders offer a form of installment loan, they are not the only ones. Your paycheck secures their loans, hence the name.
However, you can take out an installment loan with a lender who isn’t a payday lender. You can apply for installment loans online. This approach has several benefits.
You can shop around for the best interest rate, though an unsecured installment loan will always have a higher interest rate than a secured loan like a car loan.
You can compare lenders based on reputation, loan terms, and collection practices. You don’t have to go to the payday lender on the corner because you have options.
Bad Credit Equals No Loan Options
This myth contains a germ of truth. If you have bad credit, it is unlikely that your bank will offer you a credit card or other unsecured loan.
They may offer a secured loan like a car or home loan, but it will have a high interest rate. Or they may say no. This could leave you with the mistaken belief that you can’t borrow money unless you can beg someone you know to loan you money.
In reality, installment loans are an option if you have sufficient income. Creditors will judge your eligibility based on your income relative to your outstanding obligations. They’ll generally use other essential criteria, too.
For example, they may require you to earn a particular weekly amount to qualify for an installment loan. Age restrictions are common. Identity verification is mandatory to prevent identity theft.
On the flip side, you must research to ensure that the installment lender is legitimate before you send them a picture of your driver’s license and pay stub.
No Paperwork, No Loan
Many of us think there must be a written contract for a legally binding deal. We consider signing the mortgage paperwork when buying a home or filling out several pages to buy a car.
If you apply for an installment loan online, is it legally binding?
The answer is yes unless it is a website run by identity thieves. Clicking on the check box that says you approve of the terms and conditions is considered consent.
That is true when you enter your name and contact information in their fields and hit submit. The deal is done if they deposit money in your bank account. And you will legally owe them the first payment and interest on the agreed-upon schedule.
The fact that you applied for the loan online will not prevent them from sending collection agencies after you if you fail to pay it.
Applying for an Installment Loan Hurts Your Credit
An installment loan will eventually hit your credit report. Failure to make the payments on time will hit your credit report. However, an installment loan application will not result in inquiries to your credit bureau file.
And if you pay the payments on time, it may not show up on the credit report while you’re getting approved for a business loan or mortgage. Yet, you must ensure you can pay all your payments because a late fee will eventually hit your credit.
I’m Responsible for Others’ Debt
There are only two cases where this is true. The first case is when your spouse takes out a loan while you’re married and married in a community property state. In this case, each partner is legally obligated to pay the debt in the other’s name, even if they didn’t know about the loan then. You are not responsible for debts they took out before you were married or after a divorce.
The other case in which you could be held responsible for someone else’s debt is if you’re a co-signer on a loan. You’ll know if you’re a co-signer because you are legally obligated to co-sign the loan with the original applicant.
Your credit report will be run, too, because creditors want to know if you can pay the debt if the primary applicant cannot. If they don’t pay the debt, you’ll be held responsible. That is why you shouldn’t co-sign a loan for something you cannot or will not want to pay. Note that an installment loan doesn’t require a co-signer. In many jurisdictions, you’re not allowed to have a co-signer.
You are not legally responsible for your parent, sibling, or child’s debts unless you are a co-signer.
Paying Off Debt Hurts Your Credit
Your credit score is based on some factors. Your payment history is one. Your debt utilization ratio is another. Paying off loans will not hurt your credit. Closing unused lines of credit may hurt your credit.
However, it protects you from being hit with late fees and penalties because you didn’t pay an annual fee you didn’t know would be charged on an unused account. It also protects you from identity theft because a new card can still be stolen with debt in your name.
If you’re trying to get control of your finances, pay off your smallest debts or those with the highest interest rate. Close the store credit cards that charge substantial interest rates and tempt you to overspend at given retailers.
Pay off your installment loans so you no longer have to make these steep payments. You’ll free up cash you can save for emergencies or pay down other loans.
Get rid of payday and title loans so that you can escape the cycle of debt they tend to trap people in. And paying off repeat loans like this will improve your credit and prevent you from becoming over-extended.
Don’t let the many myths and misconceptions about installment loans prevent you from considering this option. Research and explore your options to find the right financial product.