Installment Loans

Installment loans are loans that are repaid in equal monthly payments, or installments, for a specific period of time. An example is a car loan. The basic terminology for loans is much the same as that of credit in general and the terms presented in the What is credit? segment apply here as well.

Getting a loan
There are three primary factors, sometimes referred to as the "three C's" that lenders consider in deciding whether or not to make a loan.

Capacity is your present and future ability to meet your payment obligations. This includes whether you have enough regular income to pay your bills and debts.

Capital refers to your savings and other assets that can be used as collateral for a loan.

Character refers to how you have paid bills or debts in the past. Your credit report is one tool lenders use to consider your willingness to repay your debts.

Comparing rates
Before you commit to a loan, shop for the best APR. Even a 1% change in the APR can affect the price of your purchase over the life of the loan—this is true of credit cards as well. The table below shows the difference that 1% can make in the cost of a $5,000 loan paid over 5 years.

As you can see, a loan could cost $148.20 more if your APR was 11% instead of 10% ($6,522.60 - $6,374.40 =$148.20)

If you were charged a 16% APR, the loan could cost you $921 more than a loan with a 10% APR ($7,295.40-$6,374.40=$921). The expense of high interest rates should be kept in mind when using credit cards as well.

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