Most everyone knows that it’s often necessary to take out a loan for major purchases such as buying a house or a car. Because of the size of these loans, borrowers take years to pay off their balances. However, there are plenty of other instances where someone may need to take out a loan for a much smaller amount, such as unexpected medical bills, sudden vehicle breakdowns, and other emergency situations. In these cases, borrowers most likely will be seeking out a short-term installment loan. Unlike mortgages and auto loans, these are usually paid off within a year. They can be a lifesaver when surprises happen, providing borrowers with a practical solution to gaps in their finances.
Compared to payday loans that need to be repaid within weeks, or long-term installment loans that have much longer payment schedules, short-term installment loans fall into the sweet spot for many borrowers. Read on to learn more about why these loans can be beneficial for those in need of immediate funds.
The Benefits of Short-Term Installment Loans
Taking out a short-term installment loan may be the smart choice for borrowers, depending on their circumstances. Perhaps the most popular option for getting quick access to funds for major purchases and paying them back over time is using a credit card. This is a form of what’s known as revolving credit, which enables the borrower to continue adding to the amount they borrow as time goes on instead of setting a fixed amount at the start. Compared to payday loans, credit cards and other forms of revolving credit, a short-term installment loan offers benefits such as:
- Flexibility: Unlike payday loans, which most often need to be paid off before the borrower’s next paycheck, short-term installment loans provide borrowers with more breathing room. The completion date for the loan can be as many as 12 months from when borrowers receive their funds, which gives them more time to make payments and structure their finances around them. Many people prefer this as it allows them to plan ahead and adjust their budgets.
- Predictability: With a fixed monthly payment schedule, short-term installment loans are easier to plan around and fit into an individual’s budget. Payments for revolving credit can fluctuate depending on the borrower’s spending, which can put a lot of strain on his or her finances as the amount they owe quickly can spiral out of hand without caution.
- Interest Rates: Because of their finite payment schedules, short-term installment loans can result in borrowers spending less on interest payments compared to a credit card. That’s because paying down a credit card balance can take much longer depending on spending habits, and the longer it takes to pay off the balance the more interest has to be paid overall. A short-term installment loan removes this uncertainty because the amount of the loan can’t be increased once it’s initiated.
Considerations Before Taking a Short-Term Installment Loan
Although a short-term installment loan may be very beneficial for someone’s financial health at the moment, that’s only if they go into the process knowing what to expect. There are a number of things that need to be considered before starting down that road, and without proper prep work the borrower may not have a good experience. Here are a few of the most important factors to consider before anyone applies for a short-term loan:
- Financial Health: Before applying for any type of loan, borrowers need to think about whether they will be able to repay it. Even if approved by a lender, that doesn’t mean borrowers are in the clear. They need to understand the terms as much as possible and think about how the payments will fit into their current budget. If making the regular payments looks like it will put them in a bad position to pay other bills or meet any financial goals they may have, they should probably think twice.
- The Total Cost of Borrowing: There’s more to monthly loan payments than a portion of the money that was borrowed. Part of being a responsible borrower is understanding the full cost of any loan. This means knowing the interest rate being charged as well as any fees the lender may assess. Taking out loans frivolously without a clear plan or full knowledge of what it can cost is a sure way to get into trouble.
- Impact on Credit Score and Financial Health: Missing a payment on a short-term loan by a week or two may not seem like a big deal, but it can have lasting repercussions on financial health well into the future. Missed payments can hurt a borrower’s credit score, which means it can become more difficult to get a loan later. This is why it’s so important to know how a loan can impact a borrower’s financial situation before applying for one. A mistake now can have serious effects later.
Loan Qualification Factors
Building on that last point, any potential borrower should be aware of how they might stack up in the eyes of lenders before applying for a short-term installment loan. Lenders don’t want to take on any unnecessary risks for themselves, which means they’re looking for applicants who are most likely to pay back their loans in full without complications. They will look closely at credit score, income, and employment status as they process the application. Some lenders may be willing to back borrowers with lower credit scores, but in general they will be wary if they spot any red flags such as spotty employment history, poor credit, bankruptcies, heavy pre-existing debt, and more.
How Vergent LMS Enhances Short-Term Installment Lending
With a powerful suite of automation features, Vergent LMS is the ideal software platform for short-term installment loan management. Practically every aspect of loan origination and servicing can be automated through our solution, providing greater efficiency and speed. Borrowers can take advantage of the built-in portals to manage payments and other account functions with ease, as well. The integrated reporting and data analysis tools Vergent LMS provides for lenders also gives them insights into their customers and helps them make the most informed decisions possible to mitigate risk. Thanks to our extensive compliance tools, there’s little need for lenders to worry about staying current with all the newest regulations, either.
To learn more about Vergent LMS and how it can transform lenders’ short-term installment loan management, reach out and speak with a member of our team today to schedule a demo.