These days, it seems like everything classifies as a “large purchase,” especially weekly trips to the gas station and supermarket. Those don’t leave much left over for savings and investments. Putting aside money for retirement and emergencies must take precedence, so how is buying a new car or a home possible? Installment loans make those purchases possible.
Some of you may ask, “what is an installment loan?” We’ve all heard terms like “auto loan” and “mortgage” before, but the words “installment loan” are rarely used in media advertising. That’s because it’s a broad category. An installment loan is any loan you take out that is paid back in fixed monthly installment payments.
How Do Installment Loans Work?
Installment loans can be secured or unsecured. An auto loan is secured. The car works as collateral for the loan, so any default leads to repossession of the vehicle. The buyer borrows the money to purchase the car and pays it back in regular monthly installments. Auto loans use fixed interest rates, so the buyer knows how many months they need to pay.
Another type of installment loan is an unsecured personal loan. These are also paid back in regular monthly payments with a fixed interest rate. The difference is that there’s no collateral or security to ensure repayment. Lenders usually look for higher credit scores to approve unsecured loans than they do with secured installment loans.
What these two types of loans have in common are equal monthly payments and fixed interest rates. These make it easier for the borrower to budget, an essential component during tough economic times. They’re more convenient, even when the economy is good, so it should be no surprise that installment loans are so popular.
Installment Loans Give Consumers More Purchasing Power
Let’s look at some numbers. According to Ramsey Solutions, a well-known financial coaching service, the median price of a home in the United States at the beginning of 2022 was $392,000. On January 14th, Kelley Blue Book announced that the cost of an average new car topped $47,000 for the first time. The median household income in the US is currently $76,563.
Based on those numbers, only the wealthiest people in America can afford to pay cash for a new car or home. Installment loans level the playing field by giving consumers more purchasing power and breaking the asking price into affordable monthly payments. Installment loans provide families with average incomes the ability to live a more comfortable lifestyle.
The Bottom Line
Installment loans help with large purchases. Without them, high-ticket items like cars, boats, and RVs would sit in showrooms, and people couldn’t afford homes. Installment loans come with fixed interest rates to help buyers budget their new purchase, whether a new car or a house. With installment loans, consumers can make larger purchases to improve their lives.