Everything You Need to Know About Installment Loans

Not sure how installment loans work?

Believe it or not, an installment loan is a pretty common financial product (you might actually have one right now!).

In this guide, we’ll walk you through the following:

  • The Different Types of Installment Loans and
  • What You Can Do With Them
  • Pros and Cons of Installment Loans

Learn how an installment loan works so you can choose the best borrowing option for you!

What Is an Installment Loan?

An installment loan is a loan agreement where the borrower pays it back through fixed monthly payments.

Also known as installment credit, installment loans are close-ended credit accounts that you pay off through FIXED monthly payments.

The interest rate agreed will depend on:

  • Loan amount
  • Credit score or credit profile
  • Collateral/s pledged

An installment loan usually comes with a FIXED interest rate as well.

After the borrower receives the loan amount, they have to repay the installment loan over a certain period of time that’s agreed with the lender.

The loan term can last for YEARS, depending on the monthly payment amount.

Once the loan payment with the interest rate is fully paid, the account is closed permanently.

What Can I Do With Installment Loans?

With an installment loan, you can make LARGE purchases and debt consolidation.

It’s a loan service that gives you the FULL loan amount at once.

An installment law will make it possible for the borrower to:

  • Buy a home or a car
  • Pay tuition fee or education expenses

The lender sets the scheduled payments with the borrower. In most cases, they’ll let the borrower know the monthly payment amounts before you accept the loan terms.

Types of Installment Loans

There are different types of installment loans. Each type has its own interest rate, repayment term, extra fees, and penalties.

Each installment loan is designed for SPECIFIC PURPOSES.

Here are some of the most common types:

Mortgages

A mortgage loan is used to buy a house.

Automatically, the house becomes collateral to make sure the borrower heeds to the loan term. This makes the mortgage interest rate LOWER compared to others.

  • Standard Monthly Principal: has a set amount
  • Interest Rate: fixed
  • Repayment Term: 15-30 years with monthly payments
  • Penalties: If you fail to follow the payment schedule, the lenders have the right to take away the house.

Auto Loans

Auto loans are used to buy a car.

In an auto loan, the vehicle serves as collateral and automatically makes its interest rate lower than the unsecured loans.

  • Standard Monthly Principal: has a set amount
  • Interest Rate: fixed
  • Repayment Term: 3-7 years (depending on the loan amount) with monthly payments
  • Penalties: Lenders will have the right to take ownership of the vehicle if you fail to pay the installments on time.

Personal Loans

Personal loans can be used for ANY PURPOSE. This loan is usually used to pay emergency expenses or for debt consolidation.

Here are a few examples as to where personal loans can be used:

  • Medical Expenses
  • Home Improvements
  • Weddings

Personal loans have higher interest rates than the others as there is NO COLLATERAL presented.

  • Standard Monthly Principal: has a set amount
  • Interest Rate: fixed
  • Repayment Term: 1-8 years (depending on the loan amount) with monthly payments
  • Penalties: Lenders have the right to report the borrower to authorities if they fail to pay the monthly installments. This will directly affect the borrower’s credit scores.

Other Types

The previous three mentioned are the most common ones, but there are other tailored loans like:

  • Student loans: You loan to get higher education and then pay off student loans for a fixed amount over time. Interest rates, terms, and repayment options depend if the loan is granted by the federal government or a private entity.
  • Payday loans: A payday loan helps borrowers receive enough money to buy what they need until the next paycheck, like a cash advance. You can directly deposit the cash to your bank account after payday. However, this loan has VERY HIGH-interest rates (reaches triple-digit APR rates) and tends to trap the borrower to pay unending loan amounts. Avoid this loan as much as you can.

There are more installment loans in the financial market, and you can tailor them to fit your situation.

What Are the Differences Between Secured vs. Unsecured Installment Loans?

A Secured Installment Loan Will Require You to Use Collateral

For example, in the case of auto loans, the loan is used to buy a vehicle. If the borrower fails to pay the lender, the lender has the right to take away the vehicle.

The same goes for home loans, where the lenders have the right to foreclose the home in the event that the borrower fails to make their scheduled payments.

An Unsecured Installment Loan Does Not Require Collateral

Most personal loans go under this category as the lenders do not have access to a fixed asset the borrower purchased with the loan.

In this case, lenders may report the borrower for their late payments to credit bureaus for legal action.

Applying for Installment Loans

Make a Rough Estimate of All the Expenses

First things first, calculate your estimate for this loan. Get a general overview of what you should expect for your monthly payments to see if they will fit your budget.

You might also need to pay for other fees such as:

  • Application processing fees
  • Transaction fees
  • Loan origination fees
  • Late payment fees

It would be a great idea to INCLUDE THESE in your calculations.

Gradually Start the Loan Application Process

The second most important thing you should remember is to check your credit to avoid any complications when you apply.

If you feel like this type of loan is what you need, you can apply for an installment loan by filling out an application form given by the lender of your choice.

You must:

  • Specify the purpose of the loan
  • Gather your personal documents (proof of identity, proof of residence, proof of income, and your Social Security card)
  • Present your credit report

The Lenders Will Take It From Here

The lender will then base their terms on these and discuss various options for:

  • Down payment
  • Term of loan
  • Payment schedule
  • Payment amount

Be particular and do background research on your chosen lenders.

You can check sites like Best Online Mortgage and Better Business Bureau for online installment loan reviews and recommendations.

You can close off a loan by making the required payments. You can also SAVE some interest charges by paying off the loan before the end of the term.

How to Find the Best Installment Loan Rates for You

The best rates for a loan will largely depend on your credit and finances.

Here’s what you can do to find the installment loan best fit for you:

Regularly Have a Credit Check

Lenders will check your credit records. Make sure they don’t have any discrepancies. Also, ALWAYS remember to PAY ON TIME!

Do a credit check on yourself before the lenders do!

A recorded late payment can take a hit on your credit score.

Maintain a Good Credit Score

Build up good habits to maintain a good score. Make sure you pay your credit card debt on time to keep your debt-to-income ratio low.

Consider getting a mix of credit services as well!

Check the Loan’s Eligibility Requirements

Some lenders might require you to share the source of your income, while others don’t really mind about your credit scores.

Research on different lenders’ requirements in determining your creditworthiness and find the one that matches your records.

Study the Repayment Terms

Depending on the loan you’re availing of, your repayment terms can last for 2-3 years, or even as long as 10 years!

So how will the repayment term affect your loan?

  • Shorter repayment term = increased monthly installments, decreased interest
  • Longer repayment term = fewer monthly installments, increased interest

If your score can’t get you access to a good rate, you can shorten your repayment terms to save you some money.

Pros and Cons of Installment Loans

All in all, an installment loan seems pretty ideal with its flexibility and fixed payments. Each type seems to equip you with all the tools you need for your planned purchases.

BUT before you dive into it, it’s important to look at all the information, both the good and the bad.

Pros

  • Fixed monthly payments – Having access to a fixed payable amount in a given term will help you BUDGET EASILY and set your expectations.
  • Fixed interest rates – There will be no surprises even when the market shifts. Your RATES WILL STILL BE THE SAME, keeping your budget stable.
  • Diversifies your financial record – Managing different types of credit and paying them on time definitely BOOSTS YOUR RECORD. This will make applying for other loans in the future easier.
  • Boosts your credit score – As long as you pay them on time, this is the EASIEST WAY to up your credit scores.

Cons

  • Risk extra fees and penalties – Some loans require origination fees or prepayment fees on top of repayments.
  • Might have a high-interest rate– Rates will still depend on the lender and your credit profile. You need to have a good score to get a lower rate.
  • Some might require collateral – Your lender might require you to provide collateral, depending on your application.

FAQs

How Will Installment Loans Affect Your Credit?

  • On-time payments will boost your score. Payment history affects 35% of your score on time and can help up your score. At the same time, a late payment will pull it down.
  • Paying in full can bump up your score. You can pay loan amounts in FULL even before the agreed term ends. It won’t have a huge impact, but it will definitely make your record clean.
  • It’s good on your credit report for up to 10 years. Your installment loans become closed accounts once they’re fully paid. Closed accounts can stay on your record for 10 YEARS, and you can use them to apply for different loans.

Just make sure you keep up with your monthly dues. Not doing so will risk damaging your record or even losing collateral.

Always be attentive to your debt-to-income ratios so that you can still have access to other loans in the future.

How Is An Installment Loan Different From a Revolving Credit?

The most common loan products are installment loans and credit cards. But what are their main differences?

  • Monthly payment – Monthly payments of installment loans are fixed and divided equally, while credit card payments can differ depending on the outstanding balance and interest rate.
  • Loan amounts – With an installment loan, the money lent will be released once in a FIXED amount. You cannot add to it. On the other hand, the amount of credit in your credit card will depend on your CURRENT BALANCE AND LIMIT. You can request a higher credit limit depending on your repayment history.
  • Interest rate – Installment loan rates are fixed even if the market shifts. With credit cards, it can increase due to late payments or when a promo rate expires.

If you’re looking for loans other than installment loans, you can resort to getting revolving credit instead.

Revolving credit lets you loan money repeatedly until you reach a set limit. You then pay this off monthly to up your credit score. Credit cards are a form of revolving credit.

Can I Use an Installment Loan to Pay My Credit Card Debt?

The answer is a SIMPLE and STRAIGHTFORWARD Y-E-S!

In the case that you’re having quite a difficult time paying off credit card debt, you can use money from a personal loan to pay it off.

This way, you might even SAVE up by paying a fixed lower interest rate to your installment loan rather than a higher one to your revolving credit.

Can I Still Get an Installment Loan If I Have Bad Credit?

Lenders have different requirements. Installment loans are tailored for those with bad credit scores, but you MUST be diligent and research if this loan will make things better or worse for you.

There’s a chance that you’ll probably get higher rates and more loan fees (ex. origination fees).

How Do Installment Loans Work for Debt Consolidation?

Installment loans tend to offer LOWER interest rates than credit cards, making them fit for debt consolidation.

Paying less interest lets you concentrate on paying one fixed bill instead of several at once.

Can You Do Multiple Installment Loans?

Yes, you can! It’s actually pretty common.

You can avail of a different type of installment loan while paying off another one. For example, you can get both a mortgage loan and an auto loan simultaneously.

A Brief Recap on Installment Loans

Installment loans lend you a lump sum of money to finance big purchases like a car or a home. There are different options for an installment loan, and you can tailor them to your needs.

Like most loans, there are pros and cons that you have to consider.

Installment loans are FLEXIBLE and have LOWER INTEREST RATES, but you also risk a negative impact on your credit report.

If you fail to pay back the money, your score will get lowered.

Final Words

Make sure you research all the important information regarding the loan that you’ll be getting. Compute an estimate for your budget.

Ask the lender for all the nitty-gritty details before you agree to borrow their money.

We hope this guide gives you enough access and tools to look for different loan options.

If you have any questions, feel free to comment them down below!

Skip to content