Education News Simulator Your Money Advisors Academy Table of Contents What Is an Installment Loan? 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 Buy Now , Pay Later How Installment Loans Function Flexible terms and lower rates are part of installment loan advantages By J.B. Maverick Updated May 20, 2022 Reviewed by Thomas Brock Truth checked by Ryan eichler An “installment loan” is a broad term that refers to the vast majority of personal and commercial loans granted to borrowers. Installment loans comprise any loan that is paid back with regular installments or payments. If you’re considering making an application for one of these installment loan there are pros and cons you need to take into consideration first. Here’s what you must consider before taking one out. Key Takeaways Installment loans are personal or commercial loans that the borrower has to repay by making regular payments or installments. For each installment payment the borrower has to pay back a part of the principal lent and is also responsible for the payment of fee for the loan. A few examples of these different installment loans include auto loans and mortgage loans as well as personal loans as well as student loans. The advantages for loan 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 provides the borrower a fixed amount of money that must be repaid with regular payments. Each payment on an installment loan is accompanied by the repayment on a portion of principal amount borrowed and also the amount of interest to be paid on the debt. The primary factors that determine how much each monthly loan payment include an amount for the loan to be paid, the interest which is charged to the borrower and the duration that is the loan. The regular amount for payment usually due on a monthly basis remains the same throughout the loan period, making it easy for the borrower ahead in order to make needed payments. The majority of loan applicants must pay additional fees on top of interest charges for example, processing charges, loan origination fees, and possibly additional charges for late payments, for instance. Different types of installment loans The most popular types of installment loans are auto loans such as mortgage loans or personal loans and student loans. Apart from mortgage loans and personal loans, which are usually variable-rate loans where rates of interest change throughout time of loan the majority of loan installment loans offer fixed-rate loans in which the cost of the interest over the term of the loan is set in the moment of borrowing. Secured vs. Unsecured Installment Loans Installment loans may be either secured (collateralized) or unsecured (non-collateralized). Mortgage loans are secured by homes that the loan is used to purchase, and the basis for an auto loan is the vehicle purchased using the loan. Some installment loans (often called personal loans) can be extended without collateral being needed. The loans that are extended with out the requirement of collateral will be granted based on the borrower’s creditworthiness, usually portrayed through the score of their credit, and the ability to pay back as proved by the borrower’s income and assets. The interest rate charged for the non-secured loan tends to be higher than the rate that would be paid on a similar secured loan in recognition of the larger likelihood of non-payment the creditor accepts.1 If you’re thinking of taking out an installment loan, you may want to look into an individual loan calculator to determine what type of interest rate that you’ll be financially able to manage. Application for an Installment Lending The borrower can apply for an installment loan by filing an application with the lender. The lender usually specifies that the purpose for the loan one example is for the acquisition of a car. The lender discusses with the borrower several options in relation to concerns like the downpayment or the amount of the loan along with the payment schedule and the amounts of the payments. If someone wants the loan amount of $10,000 to finance buying a car for instance, the lender informs the borrower taking a bigger downpayment can result in a lower interest rate or the borrower might have lower monthly installments by contracting an loan for a longer term. The lender also reviews the borrower’s creditworthiness in order to determine how much credit is available and the loan terms they are willing to offer. The borrower is typically able to retire their loan when they make the necessary payment. In most cases, borrowers can avoid the cost of interest by repaying the loan prior to the end of the terms stipulated in the loan agreement. Some loans will impose penalties for late payments if the borrower repays their loan early. Advantages and disadvantages Installment loans are very flexible and they can be designed to meet the borrower’s personal needs in terms of the loan amount as well as the length duration that is best suited to the borrower’s capacity to pay it. These loans permit the borrower to get finance at a lower rate of interest than can be obtained through revolving credit financing like credit cards. In this way, the borrower has more cash on reserves for use in other purposes, rather than making huge cash expenses. Pros Financing big purchases The amount paid for a loan typically remains the same throughout the loan term It is typically possible to lower costs for interest by paying off a loan early Cons There are many loan costs that can be high. The credit score can be damaged due to missed or late payments Possibility of borrowing more than necessary For longer-term loans however, the drawback is that the borrower may be paying for a fixed interest loan at a higher amount than the market rate. The borrower may be allowed to refinance his loan to a more affordable interest. The main drawback of an installment loan is the result of the loanee being locked into a long-term financial obligation. At some point, circumstances may make it impossible for the borrower of making payments on time with the risk of default and possibly losing any collateral that was used to fund the loan. Installment Credit Scores and Loans In the event of an installment loan at the time it is due is an excellent way to improve your credit score. Your payment history is one of the most crucial factor that determines your credit score and a long track record of responsible and responsible credit use will improve your credit rating.2 As was mentioned previously, your credit score could get a knock if do not pay on time or you don’t pay back the loan–which is also considered a red flag in lender’s eyes. The Bottom Line An installment loan will allow you to finance big purchases, such as a new car or home. Like any loan there are pros and cons to think about. Advantages include flexible terms along with lower interest rates. But an important disadvantage is the danger of default. If you choose to take out an installment loan Make sure you shop around and compare rates and the terms of loans before signing your signature on the dotted lines. Article Sources Related Articles Man looking over papers Personal Lending Payday Loans Compare. Personal Loans: What’s the Difference? Small red home with money pouring out just like tape pulled from the dispenser, set on a flange of $100 bills. Home Equity The Home Equity loan versus. HELOC: What’s the difference? A model of a home on a calculator Mortgage Mortgage Calculator Personal Credit Are personal loans considered income? Bills tower high on the man’s palm and the blue background of documents. Loans The Most Effective Methods to Borrow Money Two people working on papers Student Loans Are student loans amortized? Partner Links Related Terms Simple Interest Definition: Who gets the benefit, Through Formulas and Examples Simple interest can be a simple method of calculating the rate of interest cost on the loan. More Signature Loan An signature loan is a personal loan provided by banks and other finance companies that relies only on the borrower’s signed signature and a promise to make payments as collateral. more Subprime Auto Loan Auto loans that are subprime loan is a kind of loan utilized to finance purchases of cars. These loans are available to people who have low credits or credit history. More What is a Mortgage? Typesof Mortgages, How They Work and Examples A mortgage is a loan which is used to purchase or maintain real estate. more “Default”: What does it mean what does it mean when you Default, Examples A default occurs when a borrower fails to meet the requirements of a debt, whether of interest or principal. more What Is an Amortization Schedule? How to Calculate With Formula An amortization schedule is a complete schedule of periodic blended loan payment schedules, which show the amount of principal as well as how much interest. More
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