What is an installment loan & how does it work?

You're not alone if you’re not sure what an “Installment Loan” is. Many people hear the term but don’t fully understand what it is all about. Installment loans are a common form of credit and might already be part of your financial toolkit. Let’s delve deep into installment loans and discuss what they are, how they work, and why they might be a practical choice for your financial needs. From buying a car to funding education, installment loans can be tailored to meet various financial goals.

What is an Instalment Loan?

An Instalment Loan, or instalment credit, is a closed-ended credit account designed to be repaid over a specified period. These loans are versatile, serving various purposes, from general expenses to specific financial objectives such as purchasing a home or funding education.

Unlike open-ended credit accounts like credit cards, where borrowing and repayment can occur indefinitely, Instalment Loans have a predetermined repayment term. This structure provides borrowers with a clear timeline and fixed payment amounts, offering stability and predictability throughout the loan repayment process.

How Instalment Loan Works?

When you opt for an Instalment Loan, you receive the borrowed amount upfront or the item you purchase immediately. This loan is then repaid through regular, predetermined payments called instalments. These instalments typically consist of principal and interest, spread over a fixed period, whether weeks, months, or years. The account is closed permanently once you've repaid the loan in full.

Your credit score can influence the interest rate you're offered for an instalment payment. Those with good credit might secure lower rates, while individuals with average or below-average credit may face higher interest charges. Despite credit standing, Instalment Loans offer financing options to many applicants.

Unlike revolving credit accounts like credit cards, Instalment Loans have a fixed end date. With revolving credit, you can borrow, repay, and borrow again if the account remains open and in good standing. This key difference makes Instalment Loans a structured and predictable option for those seeking financing.

What are the Types of Instalment Loans?

Instalment Loans come in various forms to meet different financial needs and circumstances. Here are some common types:

• Marriage Loan: Designed to cover wedding expenses, from engagement to honeymoon.
• Travel Loan: Aimed at financing vacations and trips without compromising on comfort.
• Home Renovation Loan: Used to renovate or redesign homes to suit personal preferences.
• Debt Consolidation Loan: Helps consolidate multiple EMIs from different loans into a single, manageable payment.
• Loan for Government Employees: Tailored for government employees with easy repayment options.
• Medical Emergency Loan: Provides financial assistance during unforeseen medical emergencies.
• Student Loan: Enables students to pursue higher education by covering tuition and related expenses.
• Loan for Women: Geared towards helping women to achieve their goals and aspirations.
• Top-up Loan: Additional funds on an existing loan to meet unexpected expenses.
• Urgent Loan: Quickly disbursed funds for urgent financial needs like trips or medical emergencies.
• Small Loan: Offers smaller loan amounts starting from ₹50,000 to address immediate needs.
• Aadhar Loan: Instant loan approval using Aadhar card biometrics for hassle-free processing.
• Personal Loan for ₹5 Lakh: Loans up to ₹5 Lakh are available with minimal documentation and quick approval.
• Personal Loan for ₹10 Lakh: Higher loan amounts for significant expenses like weddings or travel.
• Personal Loan for ₹15 Lakh: Provides even larger sums to fulfil dreams and aspirations.
• Overdraft Loan: Allows withdrawal of funds as needed from a pre-approved credit limit, providing flexibility in managing expenses.

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Features & Benefits of Instalment Loans

Instalment Loans offer several features and benefits that make them a popular choice for many borrowers:

1. Ability to Address Major Expenses: Instalment Loans provide quick access to funds, making them ideal for covering significant expenses such as home renovations, car purchases, or medical bills. Whether a Personal Loan or a mortgage, Instalment Loans offer the financial flexibility to tackle big-ticket items.
2. Consistent Scheduled Payments: One of the key advantages of Instalment Loans is the predictability of regular repayments. Borrowers know exactly their monthly instalment amount, facilitating easier budgeting and financial planning. This predictability helps borrowers stay on track with their payments and manage their finances more effectively.
3. Opportunity for Loan Refinancing: Instalment Loans offer refinancing opportunities under favourable conditions. Refinancing becomes possible if interest rates decrease or the borrower's credit score improves. For an instalment payment example, in the case of a mortgage loan, refinancing could lead to lower monthly payments or a shorter repayment term, ultimately saving the borrower money in the long run. Weighing the costs and potential drawbacks associated with refinancing is essential before deciding.

How Instalment Loans Impact Your Credit Score?

How you manage an Instalment Loan can significantly influence your credit scores. Here's how:

Credit History Consideration

Lenders assess your credit history, including your credit scores, when determining whether to approve your loan application. Your credit scores also play a role in determining the interest rates and terms you're offered for the loan.

Effects on Credit Scores

• Applying for a Loan: A loan can result in a hard credit inquiry, which may temporarily lower your credit score.
• Using a Loan: How you utilise the loan can impact your credit scores positively or negatively. Making timely payments and managing your credit responsibly can improve your scores. Conversely, missing payments or defaulting on the loan can harm your credit scores. Additionally, adding a new loan can affect your credit mix and credit utilisation ratio, which are factors in calculating credit scores.

Is it Possible to Get an Instalment Loan with Bad Credit?

Securing an Instalment Loan with bad credit is possible, although with a higher interest rate than those with better credit scores. Additionally, approval chances are higher for secured loans rather than unsecured ones in such circumstances.

How to Apply for an Instalment Loan?

1. Determine Your Requirement: Understand the instalment payment meaning, identify the reason for needing a Personal Loan, and calculate the exact amount you need. Avoid the temptation to borrow more than necessary to minimise interest costs.
2. Check Your Loan Eligibility: Verify if you meet the eligibility criteria for a Personal Loan with Kotak Mahindra Bank. Typically, we require the eligibility to be a salaried individual aged between 21 and 60 years, with a minimum monthly income of ₹25,000 for Kotak Bank salary account holders and ₹30,000 for Non-Kotak Bank salary account holders. You should also have a minimum educational qualification of graduation with at least one year of work experience in your current company.
3. Compute Monthly Instalments: Utilize our online Personal Loan EMI calculator to estimate your monthly loan repayments. Ensure that the EMI amount aligns with your repayment capacity and cash inflows. To calculate the EMI, input your offered Personal Loan interest rate, desired loan amount, and preferred repayment tenure. Negotiate with the lender to secure a favourable interest rate if necessary.
4. Apply for a Personal Loan: Apply for a Personal Loan from us through convenient channels such as net banking, the mobile app, or by visiting a nearby branch if you prefer an offline application process.
5. Submit Required Documents: Alongside your application, submit the necessary documents to facilitate the loan processing. For loan amounts up to ₹5 Lakh, provide Aadhaar, PAN, and three months' bank statements showing your salary. For loan amounts up to ₹25 Lakh, submit valid identity proof, residential proof, three months' bank statements, three months' salary slips, and two to three passport-sized photos.

Should you get an installment loan?

When considering whether to take out an installment loan, evaluate the following factors:

• Necessity of the Loan: Determine if the loan is for an urgent need that savings cannot cover, such as home repairs, medical emergencies, or significant life events.
• Financial Impact: Assess the stability of fixed interest rates and predictable monthly payments and compare the cost of borrowing with other financing options, such as interest-free credit cards.
• Current and Future Financial Stability: To avoid financial strain, ensure your income is stable enough to handle regular payments over several years.
• Effect on Credit Score: Understand that an installment loan can improve your credit mix and increase your debt load, potentially impacting your credit score if not managed well.