In April 2022, Canadian household debt reached US$2,116.3 billion (roughly CAD$2.8 trillion). Although this number includes mortgages, it’s clear that the amount of money Canadians owe continues to increase with each passing year. The majority of debt consumers hold is from different types of installment loans. You may be wondering what installment loans are, but there’s a good chance you’ve had or currently have one if you owe any debt (or have a mortgage).
Continue reading to learn more about these types of loans.
What Are Installment Loans?
Installment loans allow you to borrow a predetermined amount of money as a lump sum disbursement that you’ll repay over time with a fixed interest rate. Sometimes they may have a variable interest rate, but fixed interest rates are more common.
Installment loans require you to make a regular monthly payment that is the same from month to month. Part of the payment goes toward the principal (the initial amount borrowed), with another part going toward the interest you owe.
There are many different types of installment loans. Let’s take a look at some of them.
Personal loans are the most common type of installment loan. You can take out a personal loan to pay for almost anything, as they range from $1,000 to $100,000, depending on your creditworthiness.
Typical uses include home improvement projects and car repairs. However, the most popular use of a personal loan is to consolidate high-interest debt, usually credit card debt. Exceptions for personal loans typically include:
- Business expenses
- College tuition and costs
- Down payments
A lender will provide you with a personal loan that you can repay in monthly installments over a fixed period at a fixed rate. Possible lenders include:
- Credit unions
- Online lenders
- Private lenders
The repayment period is usually 24 to 60 months, with some going as high as 72 months. The annual percentage rate (APR) is often between 4% and 36%, based on your creditworthiness.
Another popular type of installment loan is a mortgage. Most Canadians cannot afford to pay for a home upfront, so they must take out a mortgage or home loan. The lender owns part of the house until you, the borrower, finish paying off the mortgage.
Most mortgages are usually ten, 15, or 30 years with a fixed interest rate. However, because the house acts as collateral, mortgages typically have lower interest rates than other types of loans.
Yet, due to the economic downturn, interest rates are slowly rising. They are currently around 5-6%.
Home Equity Loans
A home equity loan or second mortgage allows you to borrow against your home’s equity. The loan amount you can receive is based on the difference between the home’s current market value and how much you still have left on your mortgage.
Home equity loans can have a repayment period of five to 30 years. Their interest rates are comparable to those of a mortgage.
Auto loans are the next most popular type of installment loan because they help you buy a new or used car. You can make a down payment or apply the trade-in value of your current vehicle, then pay off the rest of the cost with a loan.
The repayment period for a car loan is about 24 to 72 months. They often have an APR of between 2% and 6%. As you can see, the APR of an auto loan versus a personal loan is typically much lower. This is because the loan is secured by the vehicle.
Both federal and private student loans are installment loans. Yet, federal loans are more common because they are available to any student who needs one, and there often is no minimum credit score required to qualify.
Plus, all federal student loans have the same interest rate, and that rate is fixed. The government also offers various repayment options and benefits for students.
No-credit-check or payday loans were designed to help those during an emergency when another source of credit isn’t available. Payday loans are smaller than personal loans as they range in size from $100 to $1,000.
The idea is for you to get by until your next paycheck. In fact, your paycheck is used as security against the amount borrowed.
You will give the lender a postdated check for the principal amount plus interest in exchange for cash. Then, on your payday, the lender will cash your check. If you apply and receive a payday loan online, the company will take the funds directly from your bank account instead.
Even though these are small, short-term loans, they come with high costs.
Buy Now, Pay Later Loans
Buy now, pay later is when you make a purchase and pay it off in interest-free installments. You make the payments over a short period, usually a few weeks or months.
However, while convenient, it’s easy to get caught up in overspending and further into debt. You may spend more than you can realistically repay with this type of loan. This is because buy now, pay later loans create the illusion that your purchases are cheaper than they really are.
Secured vs. Unsecured
Aside from the different installment loans, these loans can also be secured or unsecured.
Secured loans are backed by an asset equal to the amount being borrowed. Auto loans and mortgages are both examples of secured loans.
Unsecured loans don’t have any form of collateral. Instead, there is simply an agreement to pay back the money. Personal loans and student loans are examples of unsecured loans.
Need a Loan?
As you can see, installment loans are standard for consumers to use at some point because they come in many different forms. Whether you want to buy a house or car, attend university, or consolidate high-interest debt, an installment loan is the best way to get funds.
If you need a no-credit-check installment loan fast, apply now at Tekaloan. If you apply before 14:00 EST, you will receive your funds the same day!