How to Determine the Installment Loan Amount You Really Need
Do you need to get an installment loan?
Whether you want to join the 64 percent of Americans who own a home, get to work in a better car, pay for a major unexpected expense, or pay off credit card debt, an installment loan can help.
However, it is essential to get the loan amount right. While only you can determine how much you should borrow, these tips can help you decide.
Installment vs. Revolving Debt
When you boil debt down to the very basics, it falls into two main categories: installment and revolving.
If you have ever taken a loan out to purchase a car or buy a home, you already know about installment loans. Installment debt is a set loan amount that you pay off in monthly payments, known as installments.
The lender determines the installments based on the length of the loan, the amount you borrow, and your interest rate. Once you pay all of your payments, the loan closes, and the debt is gone.
Credit cards, for example, use what's known as revolving debt. This type of debt opens up more credit as you pay it off. Once you pay off your credit card, it remains open, and you can continue to use it.
Though revolving credit might seem more appealing at first glance, it can be more dangerous for those who want to improve their financial situation.
That open credit tempts some people to incur more debt. Furthermore, spending beyond 30 percent of your revolving credit limit can hurt your credit score. Installment loans don't harm your credit the same way.
Installment Loan Benefits
If you go about finding an installment loan the right way, you can improve your credit, get out of a dangerous financial situation, and rest easy.
Each time you make a payment on your installment loan on time, you help your credit rating. Sometimes, these loans can help you pay for major emergencies like car repairs or medical bills.
In the case of car loans and mortgages, the loan allows you to own property. This is typically a better investment than paying month-to-month like for a lease or rent. Furthermore, owning a home can help you on your tax bill.
However, you must get the right loan amount.
Understand Your Financial Situation
It can be easy to try to ignore the interest rates on credit cards, amount of total debt, or bills piling up on the counter. However, the first step to deciding the right loan amount for you is to understand your current situation.
Furthermore, you may need some of these numbers handy when you go to apply for a loan, especially a mortgage.
Write down all of the following information:
- What you want to use a loan to pay off
- Monthly income
- Monthly expenses
- Current debt
- Interest rates
If you're one of the 56 percent of Americans who report debt negatively impacting your life, take a minute to take care of yourself after you complete this step.
Experts say that the best way to take care of the stress caused by debt is to make a plan. Remind yourself that you have just taken the first big step toward that plan and that this stress will be gone soon.
Consider the Monthly Payments
With all of this information in front of you, you can get a better idea of what you can pay each month. Look back at your monthly income and expenses. Take out the debt you want to pay off, then calculate how much you would have left at the end of the month.
For example, if you want to buy a home, you calculate all of your current expenses and subtract your current rent or mortgage. Subtract this number from your monthly income.
This process will help you get a ballpark idea of how much you can spend each month on your mortgage. You should also remember that your mortgage payment may include mortgage insurance, home insurance, and property taxes. Your budget per month should include these expenses as well.
Often, when you go to apply for installment loans, lenders will show you how much your monthly payments will be. However, you should not go to a car dealership and tell them your maximum monthly payment. Keep this number in mind but focus on getting the lowest overall price.
If you can get a loan with monthly payments well below your maximum, that is ideal. Doing so will leave you with some money to save or pay for unexpected bills.
Don't Take a Bigger Loan Amount Than You Need
With the steps above, you can determine the loan amount you can afford under the best circumstances. Sometimes, a lender may offer a higher amount than that. Although it can be tempting to take that money and pay for something fun, it's important to resist that temptation.
Even if a lender offers your exact maximum, you may want to go under that if you can swing it. You may want to save that extra monthly income, put it toward another purchase, or pay down your debt faster.
But Do Take Enough
Don't borrow less money just for the sake of it. Instead, sit with your budget and determine what you really need.
For example, if you're buying a car, you may decide what options are mandatory for you. You may want low mileage, great gas mileage, or specific safety features. In many cases, you don't have to compromise on these needs.
Similarly, a mortgage should cover enough for the right house. It may not be your dream home, but if you can afford to take out a bigger mortgage to pay for some much-needed repairs, that can work well.
Compare Your Offers
WireLend can connect you with lenders that meet your needs. Each lender may offer a loan with unique terms. To compare your loan offers, consider the length of the loan, monthly payment amount, your interest rate, the loan amount, and the total that you will pay.
With all of these factors in mind, you can choose the loan that makes sense in your life. Learn more about your options and how our service can help.