How Do Installment Loans Work? A Helpful Guide for Businesses

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How Do Installment Loans Work? A Helpful Guide for Businesses

Demand for business loans has increased dramatically since the onset of the COVID-19 crisis.

If you’re in need of finance at this time, you should know that there is a range of options available to you. One choice you should consider is an installment loan.

So, how do installment loans work? Read on to find out.

How Do Installment Loans Work?

Simply put, an installment loan is any borrowing that must be repaid in installments over time. The initial funds are usually paid to the borrower by the lender in a lump sum.

A key consideration when taking out an installment loan is whether you’ll need to provide collateral. This will depend on the type of loan you’re taking out, as we discuss below.

Different Types of Installment Loans

There are countless different types of installment loans. Below are some of the most common installment loans you will come across as a business owner.

Mortgages

A mortgage is a type of installment loan that almost everyone is familiar with. When you borrow money to purchase property, the loan you receive is called a mortgage.

Mortgages involve large sums of money that are paid back over long periods, often 25 years or more.

A mortgage is a collateralized loan. It is taken out in respect of a specific piece of property, which can be repossessed by the lender if you fail to make repayments.

Because lenders have this guarantee of recovery, they can lend large sums of money at relatively low interest rates with confidence. If this system did not exist, borrowers would find it impossible to borrow large sums at reasonable rates.

Term Loans

A term loan is most often used to fund small or medium purchases or to allow businesses to pay ongoing expenses.

Term loans will generally be for smaller amounts than mortgages and will require repayment over a much shorter time period.

While term loans do not automatically require collateral, many lenders will ask for it as security. Borrowers may find it very difficult to secure a term loan without suitable collateral, especially during these difficult economic times.

Equipment Loans

Like a mortgage, an equipment loan is taken out to purchase a specified asset. This asset will then serve as collateral for the lender.

Businesses can take out an equipment loan for any item necessary for their activities. However, a lender may be unwilling to allow a loan for an item they will not easily be able to sell, or one that will depreciate in value quickly once purchased.

Getting the Right Financing for Your Business at This Time

So, how do installment loans work? There isn’t necessarily a single, convenient answer to this question. The way they operate will depend on how much you borrow and what you’re borrowing for.

However, the right installment loan at the right time can make a vital difference to your business at this time.

Did you find this article useful? Keep reading our blog for more!

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