When a person wants to borrow a loan to support or aid his financial requirements at the given point in time, there are two basic types of consumer credit options available for him to choose from:

• Open-end credit
  These loans can be borrowed again and again and paid back for purchases on a cyclic month. Though a monthly payment of the dues is required, it is not mandatory for the payments to be full. Hence, these loans are also called as revolving credits. Common examples of such loans are credit cards, home equity loans, and home equity lines of credit (HELOC). Here, an amount within the eligibility limit of the consumer can be borrowed at no or very low-interest rate to be repaid within one month. However, very high-interest charges are applied when the payments of the monthly balance are not done on time.
• Closed-end credit
  These are a single lump sum amount borrowed which are then repaid with interest added, in equal distributions over a set period. Payday loans, title loans, and installment loans are commonly used terms that are associated with traditional loan types.

An installment loan is a one-time lump sum amount borrowed and paid back within a certain period at fixed intervals with a fixed rate of interest. The periodic repayments are called installments that include a portion of the principal (borrowed amount) and the interest amount. The installments are commonly paid at fixed intervals of monthly or quarterly. There are different names given to these installment loans based on the purpose it is borrowed for.However, payments of credit cards are not considered as an installment loan although it may require payments of a monthly minimum. Borrowing an installment loan is a good idea for people who do not have sufficient funds to make a payment upfront to make a purchase or need money to finish up some work but can pay back the amount over a period. These are called closed-end credits that are used finance a specific purpose and whose interest rates are tied closely to the consumer’s credit score. Installment loans fall into two categories, secured or unsecured.

• Secured loans
  These loans are borrowed by using a collateral to assure/ guarantee that the lender will be paid back. Loans borrowed for purchase of a house or a vehicle come under this category which means that the asset on which the loan is borrowed (house or the car in this case) will be seized if the payments are not done as per the agreement. In these kinds of loans, there is less risk for the lenders and more risk for the borrowers. While the lenders can be sure of getting back their money either in the form of the installment amount or through seizure of the collateral/asset itself, the borrower is prone to the risk of losing a valuable asset if he/she fails to make the payments. Examples are mortgage loans like home loans or car loans.
• Unsecured loan
  These loans do not require any guarantee or collateral to be borrowed. Here there is more risk to the lender of not getting back his money, and hence the rates of interests are high. Although there is lower risk to the borrower on losing an asset, these loans are commonly borrowed for a small amount and shorter durations due to high interests. Also, if the borrower fails to make his payments, it can do serious damage to his credits. On the contrary, if the payments are done punctually, it will help to rebuild a stronger credit history. However, certain subprime lenders have negatively marketed this product as a low-risk alternative to payday lending. Examples are marriage loans, and personal loans bought for the purchase of appliances, etc. or student loans.

Installment loans come in different shapes and sizes depending on the needs of the borrower. Irrespective of the type, the terms, and conditions of every loan is governed by state and federal guidelines to protect the consumers from getting duped due to unsavory practices. Hence, all installment loans have agreements need to specify the interest rates, loan length, and default terms to avoid confusion or potential legal action either against the borrower or the lender. Given this, there are several predatory lenders out there using unscrupulous tactics to get borrowers take a loan. Hence, it is essential to have a thorough understanding of all details before borrowing a loan. The below tips may help to avoid certain unsavory lenders:

• Good lenders offer competitive APRs.
• Better to consider well-established lenders who are available across the U.S. or beyond, offer somewhat flexible loan terms and larger-dollar loans.
• Look out for companies that are transparent regarding disclosing the APRs and fees.
• Consider the lender’s accreditation and good standing with the BBB along with longevity and reputation.
• A good lender should do a thorough credit check after you apply.