February 12, 2021
Most likely, you’ve heard lenders discuss installment loans if you’ve contemplated applying for business financing. For business owners, they’re a common funding choice, which is why you should understand how they operate.
If you are interested in seeking this kind of loan but want to better understand the usual rates, conditions, and application process, continue reading to learn what an installment loan is and how it can benefit your business.
In return for agreeing to make principal and interest payments over an agreed-upon term, an installment loan happens if you borrow money from a lender. This loan product is in contrast to a revolving credit line that can be drawn down, up to a cap, or repaid at any point during the term. It is also distinct from payday loans, which, when the company collects consumer payments, are typically repaid in a single lump sum.
In fact, all types of installment loans are financing options such as mortgage loans, student loans, personal loans, and auto loans. Installment loans can also be company loans.
The application process can vary, since the word “installment loan” encapsulates so many different forms of loans, from a short-term loan to a construction loan. For instance, while you may pursue an online installment loan, complete a few forms, and be accepted in just a few business days, it could be much more difficult to apply for a construction loan.
In general, when applying for an installment loan online or in person, you should have to provide personal and business financial details. This will probably include a recent credit report, the amount of money received per month by your company, and other financial records.
Finally, you should have a reasonable plan on how you plan to use the loan and how the balance will be paid off.
Although requirements for various loans will vary greatly, lenders will usually judge you on the basis of “The Five C’s,” which are:
To recover their losses, lenders use collateral, such as real estate, if the borrower is unable to meet their regular, weekly, or monthly payments. Although not every installment loan needs collateral, the value (or lack thereof) of your collateral will play a role in the decision of the lender to accept your application.
Your lender must agree that you are trustworthy and competent enough to successfully manage your company in order to be accepted for an installment loan.
Your lender must have reason to believe you have the capacity to repay the loan in order to be accepted for an installment loan. This also means that to determine if you have the capacity to meet your payments, the lender can use the debt-to-income ratio.
Much as you evaluated the market conditions prior to starting a company, before lending money, lenders will consider the state of the market. In fact, lenders will often fully avoid lending to companies in some sectors, irrespective of the financial health and credibility of any particular business. Conditions can also differ by state, which is something to take into account as well.
In general, the loan amount you are approved for, or the interest rates and terms that come with the approved amount, can be influenced by conditions.
You’re likely to fight much harder than someone who has no money in the company to save the company if you have a large amount of capital invested in your business. Lenders know this, so it’s vital to them that they have money invested in their own company by a borrower.
Over the term of the loan, an installment loan is usually paid back in equal amounts. There are generally set prices because of this.
However, there can be interest-only periods or fixed rates on certain installment loans, under which the payments can change over the term of the loan. It is also important to remember that there might be prepayment penalties on certain installment loans, which makes it vital that you understand your loan’s particular terms and conditions.
Initially, your credit score can take a minor hit while looking for an installment loan because prospective lenders may make a hard inquiry about your finances. However, if you make payments on time and in full for the long-term, your credit score will be boosted by an installment loan.
Nevertheless, note that when you take out a loan, there is always a chance of default or late payments that can negatively affect your credit score, even if it is minimal. Just like when you miss a payment by credit card, not repaying your loan could harm the credibility of your company, which in turn affects your entire operations.
As the SBA points out, along with lines of credit, installment loans are one of the two basic kinds of loans. But there is a considerable amount of variance within this loan group when it comes to rates, loan limits, terms of repayment, approval conditions, and other notable factors. Understanding installment loans, however, is the first step you can take before further exploring your options for business financing.