Key takeaways

  • Review your financial situation, including your credit reports and debt-to-income ratio (DTI) to assess your chances of meeting a lender’s eligibility requirements.
  • When shopping around for an installment loan, compare rates, fees and repayment terms across as many lenders as possible to find the option that best fits your circumstances.
  • Prequalify, if possible, to check estimated rates and terms you might receive from a lender.
  • If an installment loan doesn't meet your borrowing needs, consider alternative options, such as a credit card or loan from a family member or friend.

Installment loans let you borrow a fixed amount and pay it back slowly over a set repayment period. Installment loans are versatile and come in a variety of types including personal loans, mortgages, auto loans and student loans.

Regardless of the reason for your installment loan, it’s important to compare lenders to ensure you don’t end up in a less-than-ideal situation down the road. To find the loan that best suits your needs, take the following five steps listed below.

How to compare installment loan lenders in 5 steps

After deciding on the exact type of loan you need, the next step is to compare lenders. Comparing lenders will ensure that you go with the one that offers the most competitive rates, favorable terms and lowest fees for your credit situation.

1. Check your credit report

Your credit report houses all of your credit history, including delinquent payments, hard credit inquiries and all of your current debt. When you apply for a loan, lenders will conduct a hard credit check in which they look into your credit report to determine your eligibility.

While every lender has different acceptance criteria, checking your credit report is a good indicator of your creditworthiness and overall financial health. The higher your score and the lower your debt-to-income ratio (DTI) is, the more likely you are to get approved for an installment loan.

How to check your credit report

There’s an important distinction to make between your credit scores and your reports. Your score is a number based on your credit reports and created using a scoring criteria — like FICO or VantageScore — while each of your credit reports are a summary of your credit history.

You can check your credit report for free weekly by visiting AnnualCreditReport.com. This will give you reports from the top three credit bureaus that lenders use when making application decisions — Experian, Equifax and TransUnion. Additionally, if you want to check your credit score, most credit card companies give borrowers unlimited access to their FICO credit score for free as an added perk.

2. Conduct a financial audit

Before taking on more debt of any kind, look at your monthly income and financial obligations. Taking on more than you can realistically afford could put you at risk of falling behind on payments and damaging your credit.

How to conduct a financial audit

The quickest way to find out whether you can afford to take out a loan is to calculate your DTI. The DTI measures how much of your monthly gross income is compromised by your debts and is expressed as a percentage.

Most lenders prefer a DTI under 36 percent, but if that’s not possible, aim to keep your DTI under 50 percent. Paying down your existing debt in full and on time — and even early — is a sure-fire way to lower your DTI.

If you determine that another monthly payment could comfortably fit into your financial plan, then it’s time to start looking at specific lenders.

3. Research the lenders’ eligibility criteria

Before you can research lenders’ eligibility criteria, you’ll need to know where to look for installment loans.

Where to find installment loans

Installment loans are offered by nearly every institution, including online lenders, banks, credit unions and peer-to-peer lenders. However, where you look specifically for lenders may depend on your credit.

Borrowers in good credit health can look to banks and online lenders for the best rates, while those with less-than-ideal credit can turn to credit unions, peer-to-peer lenders and online lenders that specialize in fair credit loans.

What to look for in a lender

Each lender will have different approval requirements; some will require a set income or credit score, while others may not require a specific number but rather a steady income and good credit score. Be sure to check all of the details within the terms and conditions to find the exact requirements — if offered — and any hidden fees.

Each lender will also offer a different range of interest rates. The most creditworthy borrowers will get the lowest rates and most favorable terms, so keep your credit score in mind when researching. After looking at multiple lenders you’ll be able to get a rough idea of what most lenders look for in a borrower.

4. Compare rates and terms

Whether a lender meets your needs is just as important as the rates offered. Before jumping into applications and prequalifying, finalize exactly what you need when it comes to a repayment timeline. If you need a flexible repayment structure, look for lenders who allow payment date changes, if you prefer a shorter or longer timeline than what’s normally offered, make sure the lender has multiple loan terms to choose from.

Also investigate the fees each lender charges, paying close attention to origination fees or prepayment penalties. Origination fees are a set percentage — typically between 1 percent and 10 percent — of the original loan amount that you’re responsible for repaying. Origination fees eat into the value of your loan and aren’t charged by every lender so look for those that don’t charge these fees if you’re looking to save the most amount of money possible.

Prepayment penalties are fees charged by lenders to discourage borrowers from making more than their set monthly payment. For example, if you’re looking to make two months worth of payments in one go and your lender charges prepayment penalties, you could end up paying more than you’d save on interest.

While finding a lender that meets every single one of your needs isn’t likely, there are probably ones that match what you’re looking for more so than others. Keep track of the lenders you’re interested in and the loan details you want to request to simplify the process of comparing lenders.

5. Prequalify

Prequalification allows you to see your predicted eligibility odds and rates without officially applying and with no impact to your credit score. Not every lender offers prequalification, so it’s important to check prior to applying.

Prequalify with at least three of your top lenders. From there you can sift through the list to knock out the lenders who don’t offer competitive rates or those you didn’t get approved with.

If you find that multiple lenders offer similar terms and rates, look for features that set them apart. Some companies offer benefits and perks, like autopay discounts, long grace periods and payment date flexibility. Research each lender’s potential perks to find the lender that would best benefit you then fully apply.

How to get an installment loan with bad credit

It’s recommended that borrowers take the time they need to boost their credit score before turning to an installment loan. However, if this isn’t possible and the funds are needed as soon as possible, there are plenty of lenders that cater to borrowers with bad credit. However, these loans typically come with high interest rates and possibly more fees, including higher origination fees than most.

Some lenders may offer secured installment loans to those with shaky credit. They’re generally easier to qualify for than unsecured loans and tend to serve a wider audience — including those with lower credit scores. This is because secured loans are backed by a form of collateral, like a house or car, so the risk is minimized for the lender or company.

But if you fail to make the monthly payments on a secured loan, the lender has the legal ability to seize your collateral to satisfy the delinquent debt. That being said, only apply for a secured loan if you’re positive you can make the payments — both now and in the future — to reduce the risk of losing your collateral.

Alternatives to installment loans

If an installment loan isn’t the best option for you, there are alternatives out there to help you get the funds you need. Aside from a bad credit loan and borrowing money from a family member or close friend, a credit card could be a good alternative to an installment loan.

Using a credit card to finance your expense depends on the size of your purchase or project. Credit cards tend to have the highest interest rates on the market, and racking up thousands in credit card debt can be hard to crawl out of due to the interest accrual alone. If possible, opt for a card that offers a 0 percent interest rate introductory period to give yourself some breathing room from interest accrual while you pay down your balance.

The bottom line

Whether you’re looking to finance education-related expenses, a big-ticket item or a much-needed home renovation, installment loans can be a great option to make these more affordable. That said, not all installment loans are created equal.

Make sure you assess your credit and finances and compare offers from multiple lenders before deciding on a loan. Doing this will not only help you narrow down your choices but will also help you choose the loan with the best terms and interest rates for your situation.