An installment loan is any loan that a borrower repays through fixed monthly payments or “installments.” They’re a very common form of funding for many types of borrowers.
These are a popular form of credit, with approximately 27.5% of American adults having at least one installment loan in the third quarter of 2020, according to the Federal Reserve Bank of New York.¹ These loans involve repaying the borrowed money through a series of scheduled payments or “installments”, rather than a lump sum.
Installment loans come in many forms and they all carry different interest rates and terms. While they’re available to both businesses and personal, for the context of this content we will be focusing on the personal installment loan. Whether you’re considering an auto loan, mortgage, home equity loans or an online installment loan, it’s important to familiarize yourself with how they work.
Types of Installment Loans
There are various types of installment loans, such as:
- Personal loans
- Auto loans
- Mortgages
- Student Loans
- Home equity loans
- Bad Credit Loans
- Debt consolidation loans
These loans serve different purposes, and the terms and conditions can vary. Essentially, any loan where you receive your funds up front and then repay them through regular monthly payments would be considered an installment loan. This applies to an online installment loan, as well as in-person options.
Advantages of Installment Loans:
- Fixed rates: Installment loans offer predictable interest rates.
- Manageable monthly payments: Borrowers can easily budget for their loan repayments.
- Credit-building potential: Timely payments can improve one’s credit score over time.
- Financing larger purchases and debt consolidation: These loans can be used for various expenses or to consolidate outstanding debt.
- Competitive borrowing rates: Compared to other short-term credit options, installment loans often have lower cost to borrow.
- Approval for borrowers with less-than-perfect credit: Lenders may consider a borrower’s ability to repay the loan rather than solely relying on their credit history.
Disadvantages of Installment Loans:
- Risk of repossession: Secured loans may involve the loss of collateral if payments are not made on time.
- Long-term financial commitment: Borrowers must commit to making payments over an extended period.
- Fees and penalties: Early repayment or defaulting on the loan may result in additional costs.
- Higher interest rates for poor credit borrowers: Those with lower credit scores may face higher cost to borrow or may not qualify for some installment loans.
Installment Lenders
When looking for the best installment loans, it’s important to compare multiple lenders to find the best interest rate and terms for your specific needs. You can obtain installment loans from various financial institutions, such as banks, credit unions, and online lenders, as well as some peer-to-peer lending platforms.
When comparing lenders, consider factors like APR, loan terms, repayment terms, and customer service. Look for lenders that offer a competitive interest rate and favorable terms, as well as the ability to set up automatic payments to avoid late fees. Also, check for any associated fees with payment methods, which may include online payment with a debit/credit card or bank account, cash, or check, and confirm them with the lender.
By taking the time to compare lenders and best installment loans for your needs, you can secure the funds you need and make repayments without financial strain.
Variations of Installment Loans
|
Loan Type |
Interest Rate |
Repayment Term |
Loan Amount Range |
Collateral Required |
Typical Use Cases |
|
Installment Loan |
Fixed |
Varies |
$100 – $100,000+ |
Sometimes |
Various purposes |
|
Personal Loan |
Fixed or Variable |
1 – 7 years |
$1,000 – $50,000+ |
No |
Debt consolidation, expenses |
|
Auto Loan |
Fixed or Variable |
1 – 7 years |
$5,000 – $100,000+ |
Yes (Vehicle) |
Vehicle purchase |
|
Mortgage |
Fixed or Variable |
15 – 30 years |
$50,000 – $1M+ |
Yes (Property) |
Home purchase |
|
Payday Loan |
High, fixed |
2 – 4 weeks |
$100 – $1,000 |
No |
Short-term cash flow |
10 Steps to Getting a Personal Installment Loan
- Assess your financial situation and credit score with credit bureaus.
- Determine how much money you need to borrow and what you can afford to repay.
- Research and compare different installment loan options, including lenders and loan terms.
- Gather the necessary documentation, such as proof of income, employment, and residency.
- Submit your loan application, either online or in-person.
- Wait for the lender to review and approve your application, which may involve a credit check.
- Review the loan terms and conditions carefully before accepting the loan.
- Sign the loan agreement and provide any additional requested information.
- Receive the loan funds in your bank account.
- Make timely monthly payments according to the agreed-upon schedule until the loan is fully paid off.
Loan Fees and Charges
- Origination Fees
- Some lenders charge origination fees, which cover the cost of processing the loan application.
- They may charge a flat rate or a percentage of the loan amount.
- Fees may vary depending on the lender and the borrower’s creditworthiness.
- Late Payment Fees
- Missing a loan payment can sometimes result in a late fee.
- Check the loan agreement before signing to be familiar with potential late payment fees.
- Other Fees
- Installment loans may also include prepayment penalties or insufficient fund fees if a payment is returned.
- Lenders may charge fees for loan modifications, payment deferrals, or loan refinancing.
- Lenders are required to disclose information about fees and charges.
- If you’re unsure about any fees or confused, be sure to ask your lender.
Alternatives to Installment Loans
Credit cards, lines of credit, and payday loans would all be considered alternatives to personal installment loans. No matter which type of loan you’re considering, make sure to thoroughly review the terms and conditions to get the best deal.
Other alternatives may include borrowing from friends or family, using a home equity loan or line of credit, or exploring government-backed lending programs for specific needs, such as education or home improvement.
Installment Loan vs. Payday Loan
|
Installment Loans |
Payday Loans |
|
|
Repayment |
✓ Repaid through a series of fixed, scheduled payments |
✗ Short-term single payment loan due in full, usually on the borrower’s next payday |
|
Interest Rates |
✓ Typically have fixed rates |
✗ Often have very high rates and fees |
|
Repayment Terms |
✓ Longer repayment terms, ranging from a few months to several years, with fixed monthly payments |
✓ Designed to cover short-term cash shortages |
|
Loan Amounts |
✓ Some borrowers can qualify for large loan amounts |
✓ Smaller loan amounts, typically no more than a few hundred dollars |
|
Purpose |
✓ Can be used to finance various expenses or consolidate debt |
✓ Intended to cover immediate financial needs or gaps |
|
Approval Criteria |
✓ Borrowers with less-than-perfect credit scores can be approved based on their ability to repay |
✓ Bad credit borrowers may still be approved |
|
Financial Risk |
✓ Potential fees and penalties for early repayment or default, higher rates for poor credit borrowers |
✗ Can lead to a cycle of debt if not used responsibly, high risk of falling into a debt cycle |
|
Credit Building |
✓ Ability to build credit over time |
✗ Typically do not report to credit bureaus |
|
Competitive Interest Rates |
✓ Very competitive compared to other forms of short-term credit |
✗ Higher rates and fees compared to other forms of credit |
|
Risk of Repossession |
✗ Risk of repossession (for secured loans) |
✗ Typically do not require collateral |
|
Long-term Financial Commitment |
✗ Long-term financial commitment |
✗ Short-term loans |
