What is an Installment loan?
An installment loan is repaid in monthly installments. These include mortgages and car loans. Payable in installments, these loans have disadvantages.
Learn about the benefits and drawbacks of installment debt and how to apply for one. Find out which option might work best for you.
What is an Installment Loan?
Installment loans are loans that you repay with a series of monthly payments. The monthly payments and interest rates are usually the same. These are the most common types of installment loans. These are all types of installment debt.
- Alternate name: Closed-end credit terms
How is an Installment loan?
Installment loans enable you to borrow money to finance significant purchases or consolidate debt. You may buy a home or a vehicle with manageable monthly payments that span years or decades.
A loan that is paid in one lump sum is an installment loan. Lenders calculate monthly payments to reduce the loan balance and cover interest costs. Your loan balance will eventually reach zero.
Many lenders will let you see your monthly payments before you accept a loan offer. Additionally, personal loan lenders often provide preliminary monthly payment quotes without affecting your credit.
The interest rate on an installment loan is the highest in the first year. Your loan balance will be minimally affected by the first few installments. As you build momentum, these payments will eventually pay off more debt.
An example of an Installment Loan
Let’s suppose you borrow $20,000 to purchase a car. This is a 4-year loan for an auto. At a 4% interest rate, you will make 48 equal payments of $451.58. An “installment,” also known as an installment, is a payment that pays interest or reduces your loan principal. Your first payment will pay $384.91. The remainder of your payment will pay $66.67 in interest.
Your interest costs will decrease if you pay your loan balance in smaller payments over time. After your 48th payment, your loan balance will be reduced to zero.
To learn more about how this works, get familiar with loan amortization and how to build your amortization tables.
Secured vs. Unsecured Loans
Some loans need collateral. A vehicle loan is an example. The car you buy secures the loan. Lenders may repossess an automobile if monthly payments are missed. Similar home loans might also be foreclosed.
Unsecured loans don’t require collateral. Personal loans are possible with unsecured loans. Lenders can only take legal action against you if you stop paying your loan repayments. Instead, lenders may report late payments to credit bureaus and take legal action against you.
Different types of Installment loans
- Personal: Installment loans are often available for unsecured personal loans. Online loan lenders, credit unions, and banks these loans are open for nearly every purpose.
- Auto loans: Fixed monthly payments are a cost you will pay every month over the life of your vehicle loan.
- Home purchase loans: Standard installment loans can be used for either 30-year fixed-rate mortgages or 15-year mortgages.
- Home equity loans: When you apply for a second loan, you can either get the funds in one lump sum of money or pay the debt over time.
- Student loans: Student loans are generally installment loans. Each time you borrow money, you typically get a new loan.
- Other types of loans: There are many types and types of installment loans. They can be called RV loans, fertility loans, landscaping loans, or dental loans, but they all fall under installment debt.
What are the pros and cons of installment loans?
What We Like
- One lump sum
- Fixed interest rates are prevalent
- In most cases, a flat monthly payment is the best option.
- Date of payment
We don’t like
- Permanent borrowing ability
- Variable rates are prevalent
- Monthly payments can be varied
- It is possible to eliminate debt quickly or slowly.
In most cases, monthly payments will be fixed.
Installment loans usually have a fixed monthly amount that doesn’t change. As a result, it’s easy to budget for those payments over the coming years.
Spread the cost of large expenditures over time
These loans can be used to buy expensive items such as a house or car. If you don’t have enough money, an installment loan might be your only option to purchase a home or car.
Advance Notice of Debt-Payoff Deadline
Installment loans differ from credit cards in that there is a set payoff period. Your loan balance will be zero at the end of each payment, as your debt is gradually reduced with each payment.
One-time loans do not permit additional borrowing.
Installment loans are a type of one-time loan that gives money in a lump sum. If you need additional funds, you may be eligible to get another loan or funding source. Credit cards and other lines of credit allow you to borrow repeatedly.
High borrowing fees are possible.
Sometimes fees for installment loans can significantly increase the cost of borrowing. The closing costs of home loans can run into the thousands. Origination fees for personal loans can range from 1% up to 88% of the loan amount. This fee is taken from your loan proceeds. Some payday loan shops also offer installment loans. These can be as high as 400% APR.
A repayment plan is included with an installment loan. However, you can often pay it off earlier than the due date without prepayment penalties.
Limitations for Installment Loans
While loans are available to help you purchase a home or pay for your education costs, borrowing is not recommended. An installment loan requires a monthly payment. If you fail to make the monthly payments, your credit will be damaged, or the collateral may be lost.
Because life is unpredictable, you might not be able to predict when or how much you will need it. You might not be eligible to apply for any other loans if your debt-to-income ratio exceeds the limit for a one-time loan. A credit card, or another type of credit, might allow you to borrow more easily.
Alternatives to Installment Loans
If you are in dire need of money and don’t want an installment loan, a line of credit may be the best choice. Revolving loans are also known as revolving loans. These loans let you borrow multiple times before your credit limit is reached. For example, you might borrow with a credit card or a home equity line of credit (HELOC).
Line of Credit vs. Installment Loan
Lines-of-credit and installment loans share many similarities. Your credit score can impact your interest rate and other borrowing costs. You will typically get a lower interest rate and pay fewer origination fees if you have higher credit scores. With either type of loan, you may be able to pay off your balance early. Be aware of any prepayment penalties.
These are the Key Takeaways
- Installment loans can be used to borrow money for large-scale expenses.
- The debt is paid over a certain number of months.
- It is easy to budget when your interest rate and monthly payment are predetermined.
- Installment loans can be used for one-time financing.
- If you have to borrow money multiple times and then repay it, a line of credit may be more flexible.
period of time
loans and mortgage
applying for an installment loan