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Education News Simulator Your Money Advisors Academy Table of Contents What is an Installment loan? Types of Installment Loans Secured vs. Unsecured Installment Loans Requesting an Installment loan Advantages and Disadvantages Installment Loans and Credit Scores The Bottom Line Credit & Debt Buy Now Pay Later How do Installment Loans Function Flexible terms and lower rates are installment loan benefits Author: J.B. Maverick Updated May 20, 2022 Reviewed by Thomas Brock Reviewed by Ryan Eichler An «installment loan» is a broad, general expression that refers to an large majority of commercial and personal loans given to borrowers. Installment loans encompass any loan which is repaid by regular installments or payments. If you’re considering applying for the installment loan there are pros and cons you need to take into consideration first. This is what you must consider before taking one out. Key Takeaways Installment loans are personal or commercial loans that the borrower must pay back by regular payments or installments. For each installment , the borrower pays back a percentage of the principal that was borrowed. It also pays any interest due on the loan. The types of installment loans comprise auto loans and mortgage loans and personal loans, and student loans. The benefits that come with these installment loans can include flexible loan terms and lower charges for interest. The disadvantages of installment loans include the risk of non-payment and loss or collateral. What is an Installment Loan? An installment loan offers a borrower the amount they need to pay which must be repaid through regularly scheduled payments. Each installment debt is made up to a certain percentage of the principal amount borrowed as well as the installment of interest on that debt. The major factors that determine what amount is due for each scheduled loan payment is how much of the loan, the interest rate for the borrower and the term or length that is the loan. The amount of the regular installment, typically due monthly, is the same for the entire loan term, making it simple for the borrower to plan prior to the needed payments. Borrowers typically have to pay additional fees along with interest charges which include processing fees for applications, loan origination fees, and potential extra charges including late payment penalties. Different types of installment loans Common forms of installment loans are auto loans that include mortgage loans and personal loans and student loans. Apart from mortgage loans as well as variable-rate loans where rates of interest change throughout the length of the loan almost all installment loans have fixed rate loans with the meaning that the interest rate charged over the life of the loan will be fixed from the time of borrowing. Secured vs. Unsecured Installment Loans Installment loans may be either secured (collateralized) or unsecured (non-collateralized). Mortgage loans are secured by the house the loan is used to purchase, and the basis for an auto loan is the vehicle that is purchased with the loan. Certain installment loans (often known as personal loans) can be extended without collateral being needed. Loans that are extended in the absence of collateral are determined on the creditworthiness of the borrower, usually measured by an assessment of credit scores and the ability to pay, as proven by the borrower’s earnings and assets. The rate of interest charged on an unsecured loan will usually be higher than the rate that would be paid on a similar secured loan in recognition of the larger risk of not being able to repay the lender accepts.1 If you’re thinking of taking out an installment loan it is advisable initially look at an individual loan calculator to determine the sort of interest rate you’ll willing to pay. How to apply for an Installment Loan A borrower seeks an installment loan by signing an application form with the lender, typically stating why they want to take out the loan, such as that of purchasing a vehicle. The lender discusses with the borrower numerous options concerning issues like the down payment, the time frame of the loan and the payment timetable as well as the total amount to be paid. If an individual wants to take out a loan of $10,000 to finance an investment in a car in the example above, the lender informs the borrower that having a higher downpayment could result in lower interest rates, or that the borrower could get lower monthly payments by taking out an loan for a longer term. Also, the lender evaluates his creditworthiness to determine the amount of credit they will grant and the loan terms they are willing to provide. The borrower typically retires their loan via the required payment. Borrowers can usually save the interest cost by paying off the loan prior to the expiration of the term set by the loan agreement. Some loans have penalties for prepayment if someone pays off their loan in advance. Advantages and Disadvantages Installment loans are flexible and can be customized to meet the borrower’s particular requirements with regard to the loan amount and the length duration that is best suited to his capacity to pay the loan. These loans can allow the borrower funding at a far less expensive interest rate than is typically available through credit cards such as credit cards. Thus, the person borrowing keeps more cash in account to use for different purposes, rather than making an enormous cash expenditure. Pros Possibility of financing large purchases The amount for payment is usually the same throughout loan term It is usually possible to reduce fees on interest by paying off loan in advance Cons The fees associated with loans can be very expensive. Credit is damaged by late or non-payment payments Possibility of borrowing more than necessary For longer-term loans however, the drawback is that the borrower may be paying the fixed-interest loan at a higher interest rate than market rate. The borrower may be allowed to refinance his loan with the current lesser interest. The primary drawback to an installment loan comes from the borrower being tied to a long-term financial obligation. At some point, circumstances may render the borrower incapable of paying their scheduled bills that could result in default, as well as possible loss of any collateral used to support the loan. Installment Credit Scores and Loans Achieving the goal of paying off an installment loan promptly is an effective method to strengthen your credit. Pay history is the most important aspect that affects your credit score. A long history of good borrowing is good for your credit rating.2 As was mentioned previously, your credit score could take a hit if you don’t make timely payments or you default on the loan, which is unsettling in the eye of lenders. The Bottom Line An installment loan can be used to finance big purchases, for example, a car or your home. As with any loan, there are advantages and disadvantages to take into consideration. Benefits include flexible terms and lower interest rates, but the main drawback is the danger of default. If you’re deciding to take out an installment loan Make sure you shop around and compare rates and terms offered by lenders prior to signing the dotted line. Article Sources Related Articles Man looking over papers Personal Lending Payday Loans Compare. Personal Loans What’s the Difference? Small red house with paper money pouring out just like tape pulled from the dispenser, resting on a fan of $100 bills. Home Equity HELOC vs. Home Equity Loan. HELOC: What’s the Difference? Model of a house built on the calculator Mortgage Mortgage Calculator Personal Lending Do personal loans count as income? Bills tower high on the man’s palm as well as documents with blue Background. Loans The best ways to borrow Money Two people working on papers Student Loans Are Student Loans Amortized? Partner Links Related Terms A Simple Interest Defines Who benefits, by formula and example Simple interest is a quick method of calculating the rate of interest amount on the loan. More Signature Loan Signature loan is a personal loan made by banks as well as other finance companies . It is based solely upon the signature of the borrowers and promise to repay as collateral. More Subprime Auto Loan Auto loans that are subprime loan is a kind of loan that is used to finance the purchase of a car that’s made available to people with low credit scores or with limited credit histories. More What Is a Mortgage? Types, the way they work and Exemples A mortgage is a loan used to buy or keep real estate. More The meaning of default What Does It Mean, What Happens If You Default, Examples A default happens when the borrower fails to make payments that are required for a debt, whether of interest or principal. more What Is an Amortization Schedule? How to Calculate with Formula An amortization schedule can be described as a complete plan of periodic blended loan installments that show the amount of principal and any interest paid. more

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