If you check out the services offered by your local check cashing center, you will notice that they offer what are known as ‘installment’ loans. Most of the country’s largest check cashing companies include them in their portfolio of products. These loans are different than loans offered by banks and credit unions. The word ‘installment’ does not imply the involvement of the such financial institutions.
So what is an installment loan, and how does it differ from a personal loan taken from a bank or credit union? In principle, both kinds of loans work the same way. The differences are found in the details. Note that installment loans are intended to be short term loans that generally last around six months. In contrast, you can go to your bank or credit union and get a personal loan with terms of up to five years.
Borrower Source of Income
Both installment loans and bank and credit union personal loans require the borrower to have a source of income. In other words, the borrower has to have enough income to support paying off the loan on time. The biggest difference between the two kinds of loans is the amount of proof required.
Installment loans tend to be offered in smaller amounts compared to personal loans. As such, lenders do not require borrowers to jump through as many hoops to prove their income. Generally speaking, a couple of pay stubs are sufficient. Self-employed people, people using government assistance or retirees can prove their income in other ways
Personal loans from banks and credit unions tend to be offered in much larger amounts. As such, banks and credit unions tend to require more proof of income. For example, a borrower might have to furnish pay stubs, bank statements, and tax returns to get approved.
Installment loans tend to have shorter terms and more frequent installment due dates. For example, you might apply for an installment loan with a two-month term and four payment due dates coinciding with the day of the week you get paid. Make all your payments on time and you are done in two months. Personal loans are typically much longer.
A typical personal loan from a bank or credit union is between three and five years with payments due every month. Ona five-year loan, that means making 60 consecutive monthly payments to satisfy the debt.
Lenders make their profit on interest regardless of how long loan terms are. Because installment loans have shorter terms, they also tend to have higher interest rates than personal loans. That doesn’t necessarily mean a borrower will pay more in total interest on an installment loan. If the terms are short enough and the amount borrowed small enough, the actual amount paid could be less than what would have been paid on a personal loan from a bank or credit union.
One of the most noticeable differences between the two types of loans is approval time. A typical installment loan can be applied for and approved online or in-person within minutes. When approved at a local retail outlet, the borrower can usually get his or her cash immediately following approval.
Personal loans generally take longer to apply for and approve. The customer may get preliminary approval within minutes of application, but final approval is only given after one or more people at the bank or credit union go through the application and give their consent. Personal loan from banks and credit unions approval can take anywhere from 12 to 36 hours.
Short-term installment loans can be good financial tools for certain purposes. So are personal loans from banks and credit unions. It is important for consumers to know the difference between the two so, should the need arise, they know what kind of loan is best for their current circumstances.