Education News Simulator Your Money Advisors Academy Table of Contents What Is an Installment Loan? Different types of installment loans Secured vs. Unsecured Installment Loans Applying for an Installment Loan Advantages and Disadvantages Installment Credit Scores and Loans The Bottom Line Credit & Debt Purchase Now Pay Later How Installment Loans work Flexible terms and lower rates are installment loan advantages A.J.B. Maverick. J.B. Maverick Updated May 20, 2022 Reviewed by Thomas Brock Truth checked by Ryan eichler A «installment loan» is a broad word that describes the vast majority of commercial and personal loans granted to borrowers. Installment loans include any loan which is repaid by regularly scheduled payments or installments. If you’re thinking about using one of these installment loan there are pros and cons to consider first. This is what you must know before taking out an installment loan. Principal Takeaways Installment loans are either commercial or personal loans that borrowers need to repay with regularly scheduled payments or installments. For each installment installment, the borrower repays a portion of the principal loan and additionally pays additional interest to the loan. Example of the installment loans includes auto loans and mortgage loans, personal loans, and student loans. The benefits of these installment loans include flexible terms and lower costs of interest. The disadvantages of installment loans include the risk of deficiency and loss in collateral. What is an installment loan? An installment loan allows a person to borrow an amount that is fixed that must be returned with regularly scheduled installments. Each payment on an installment debt involves the repayment in part of the principal amount borrowed as well as the amount of interest to be paid on the loan. The main elements that determine the exact amount for each regularly scheduled loan payment include how much of the loan as well as the interest rate for the borrower and the length or term of the loan. The regular amount for payment that is typically due monthly is the same throughout the loan term, making it easy for the borrower to plan in advance for the necessary payments. The borrower is generally required to pay additional fees in addition, such as processing fees on applications, loan origination fees, and possible additional charges for late payments, for instance. Different types of installment loans Common kinds of installment loans are auto loans or mortgage loans in addition to personal loans as well as student loans. Aside from mortgage loans, which are sometimes variable-rate loans in which the interest rate fluctuates over the duration of the loan A majority of other installment loans can be considered fixed-rate loans which means the charge for interest during an entire period of time loan are fixed in time of borrowing. Secured vs. Unsecured Installment Loans Installment loans may be either secured (collateralized) or unsecured (non-collateralized). Mortgage loans are collateralized with houses that the loan is used to purchase. The car that is the collateral of an automobile loan is the vehicle bought with the loan. Some installment loans (often known as personal loans) are extended without collateral requirement. These loans without the requirement of collateral are granted based on the creditworthiness of the borrower, usually proven through the score of their credit, and the ability to repay , as shown by the borrower’s income and assets. The rate of interest on the non-secured loan generally is higher than the rate that would be paid on a similar secured loan which is due to the greater risk of non-repayment that the lender accepts.1 If you’re thinking of taking out an installment loan to fund your next project, you’ll want to first consult the personal loan calculator to determine what type of interest rate you’ll be comfortable with. Inquiring for an Installment Loan The borrower may apply for the installment loan by filling out an application through the lender. The lender usually specifies the goal of the loan that is, for instance, that of purchasing a vehicle. The lender talks to the borrower a variety of options on matters like down payments, the time frame of the loan, the payment schedule and the amounts of the payments. If a person is looking to borrow $10,000 in order to finance buying a vehicle, for example, the lender informs the borrower making a larger down payment may result in a lower interest rate, or the borrower might make lower monthly payment by making an loan over a longer period of time. The lender also analyzes his creditworthiness to decide the amount of credit available and what loan terms the lender is willing to grant. The borrower generally retires their loan in the form of required payments. Borrowers typically save costs on interest by paying off the loan before the expiration date of the time period stipulated by the loan agreement. Certain loans will impose penalties for late payments if the borrower repays their loan in advance. Advantages and disadvantages Installment loans are flexible and can easily be modified to suit the borrower’s unique requirements regarding the loan amount and length duration that is best suited to the borrower’s ability to pay the loan. These loans permit the borrower finance at a lower rate of interest than is typically provided by credit card financing that is revolving like credit cards. Thus, the person borrowing keeps more cash in the bank to be used for other purposes, rather than making an outlay of cash that is large. Pros Ability to finance big purchases Payment amount typically stays the same throughout the loan term It is generally possible to save rates of interest by repaying the loan early Cons The cost of loans can be very high. Credit damage can occur because of missed or late payments Potential to borrow more than what is needed For longer-term loans however, the drawback is that the borrower is paying for a fixed-interest loan at a greater interest rate than the prevailing market rate. The borrower may be allowed to refinance his loan at the less-interest rate. The major disadvantage of an installment loan is the result of the loanee becoming a binder on a financial commitment. Sometime, circumstances may make it impossible for the borrower of paying their scheduled bills, risking default, and the possibility of losing any collateral that was used to fund the loan. Installment Credit Scores and Loans When you are able to pay back an installment loan promptly is an excellent way to improve your credit score. History of payments is the most important factor that will affect your credit score and a long track record of responsible and responsible credit use will improve your credit rating.2 As previously mentioned, your credit score can be impacted if you fail to make your payments on time or default on the loan. It’s also an indicator in the lender’s eyes. The Bottom Line An installment loan will allow you to finance major purchases such as a new car or your home. Like every loan there are pros and cons to think about. The advantages include flexible terms and low interest rates. However an important disadvantage is the possibility of a default. If you’re looking to take the installment loan Make sure you research rates and compare rates and conditions offered by lenders prior taking the plunge. Article Sources Related Articles Man looking over papers Personal Credit Payday Loans vs. Personal Loans What’s the Difference? Small red house with paper money coming out just like tape pulled from the dispenser set on a flange of $100 bills. Home Equity Lending to Home Equity vs. HELOC: What’s the Difference? The model of a residence on the calculator Mortgage Mortgage Calculator Personal Loans Do personal loans count as income? Bills tower in man’s hands and blue Background documents. Loans The best ways to borrow Money Two people who are working on papers Student Loans Are student loans amortized? Partner Links Related Terms The Simple Interest Definition: Who benefits, With Formula and Example Simple interest is a quick method of calculating interest rate on an loan. more Signature Loan The signature loan is a type of personal loan that banks and other finance companies that depend only on the borrower’s signature and promise to pay as collateral. more Subprime Auto Loan Auto loans that are subprime loan is a type of loan used to finance the purchase of a car that’s made available to those with weak credit scores or poor credit history. More What is a Mortgage? Types, How They Work and some examples A mortgage is an loan made to buy or keep real property. More Default: What Does It Mean What happens when you Default, Examples A default occurs whenever a lender fails to make payments that are required for a delinquent debt, whether interest or principal. More What is an Amortization Schedule? How can you calculate using Formula An amortization schedule is a comprehensive schedule of periodic blended loan payments that indicate the amount of principal and how much interest. more
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