Disadvantages of an Installment Loan

An installment loan is a borrowed amount of money that is received in a lump sum and must be paid back over a period of time on a set schedule by a specified date. The specifics of installment loans make them disadvantageous when compared to alternatives. 

Fixed Interest Rate vs. Variable Interest Rate

Most installment loans have fixed interest rates. Fixed interest rates are usually higher than initial variable interest rates. Fixed interest rates do not respond to the market and can therefore remain high even if the market rate decreases. Getting stuck in a fixed interest rate installment loan can force you to continue to pay high rates even though low rates exist.

Unforgivable Conditions

The terms of an installment loan are negotiated before closing and must be stuck to.  There is no renegotiating if a borrower’s situation changes. The schedule, interest rate, and term are permanent can must be met unless a borrower is willing to face default. Because most installment loans are secured, default can mean losing a valuable asset or being required to pay the entire amount of the loan in one payment.


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