The pros and cons of installment loans are as follows.
- You receive the entire sum upfront. With installment loans, $100,000 is $100,000 – no more, no less. That’s great if you need to immediately cover expenses of that amount. It also eliminates the possibility of not paying fees or interest on a certain portion of your loan. That said, certain SBA loans are fully amortized with variable interest rates, meaning their fees can be quite low.
- You’ll know exactly what to pay and when. The contracts behind SBA and term loans – both among the most common installment loans – should clearly state your repayment schedule. You’ll know exactly how much you must pay each month and on what date. This predictability can help you better budget for loan expenses. It can also help you remember to repay your loans and avoid late payment penalties.
- You’ll have access to more money. Often, installment loans offer an order of magnitude more funding than revolving loans. That means if you need lots of money for a specific purpose – say, buying commercial property – installment loans will suit you better.
- Your fees will be lower. If you were to compare an installment and a revolving loan of the same size, you’d likely see that the installment loan has lower fees. Sure, the fees for any type of loan can vary depending on the lender, but even the highest installment rates typically fall below revolving rates. As mentioned earlier, some revolving loans have APRs of 99%, whereas the best installment loans have rates one-tenth that much.
- You’ll face penalties for late payments. Since installment loans come with a set repayment schedule, you’ll face fees if you make payments after your deadlines. Some loans also come with prepayment penalties if you decide to pay off your full balance before the payment term ends.
- You’ll face more challenges getting approved. Installment loans often have stricter qualification requirements. You’ll likely need a great credit score, and your business will likely need to have been in existence for at least two years. That said, many small business funding experts still advise any borrower who might qualify to pursue these loans.
- You’ll need a long time to apply. Installment loans’ steep qualifications introduce lots of paperwork, meaning the application process can be lengthy. But that’s changing. Certain online installment lenders have developed digital applications that streamline the whole process.
Which Is Better for a Small Business Loan: Installment or Revolving?
Your choice of installment or revolving loan will ultimately come down to two things. First, you’ll need to be clear on how you’ll use loan proceeds. Second, you’ll need to know how you can best repay it.
If you need a loan to consolidate your business debts, revolving loans might miss the mark. You’re best off using them to cover payroll, inventory, office furniture, and other tangible items. Installment loans are a better pick for debt consolidation, commercial real estate purchases, and working capital.
Installment loans are also superior if you fare better when you mark down predictable monthly payments in your business budgets and spreadsheets. If you have wiggle room to cover loan expenses when and however you please, then revolving loans should work for you.
In either case, if you’re more used to breaking even than making a profit, you may prefer installment loans. That’s because the best installment loans come with low fees and interest payments that often decrease over time. SBA 7(a) loans are a great example, and you can easily find and apply for them from your office or home.
How to Apply for an Installment Loan
Maybe you’re now ready for funding in large amounts that you can pay back over long periods with small monthly installments and low interest rates. You might also be worried about qualifying for such loans, dealing with a tedious application process, or waiting forever for funding. With SmartBiz®, you can quickly find out whether you qualify – and apply just as quickly for funding that arrives not long after. Just create a SmartBiz account to get started.