Installment loans are a lump sum of money the borrower receives upfront and then pays back with regularly scheduled payments over time. Installment loans are a bit different than most loans and this is what you need to know about them.
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What is an installment loan?
An installment loan is a type of lump sum that you borrow from a lender and repay over time with interest. Usually, these payments are set sums that are agreed upon between a lender and borrower at the time of borrowing. Installment loans are a little different than other types of financing, such as credit cards or personal lines of credit, because the sum is borrowed as a lump sum up front. Receiving more money means applying for a new loan completely.
How installment loans work?
Installment loans are typically used for one-time purchases where larger amounts of cash are needed. This could be an automobile purchase, student loans, a mortgage, and more. After deciding on the amount of money you need, as well as the type of loan, you would apply for an installment loan in that amount.
Assuming you are approved, the total amount requested will be released to you all at once so that you may make your purchase. From that point on, you will make repayments (likely monthly) including the set amount agreed upon and any interest you have accrued.
It’s worth noting that installment loans can be both secured and unsecured. For example, an installment loan for purchasing an automobile is secured by the vehicle itself. If you do not make your repayments monthly with any interest, the lender can then repossess your car. A personal loan, however, may not be secured by anything beyond the money you own to the lender.
How do I use an installment loan?
How to use an installment loan depends on what type of loan you have. For example:
- Personal loan funds can be used on just about anything that you need, such as for a wedding or vacation, home improvements, medical bills, auto repairs, etc.
- Auto loans can be used to purchase a new or used vehicle.
- Mortgages are used to fund a home.
- Student loans can be used for tuition and other qualifying educational expenses.
Regardless of the type of loan, the funds can be used just as you would cash. Once you apply and are approved for the loan, the lender will transfer the funds directly to your bank account (or they may send you a check). Or, in the case of a mortgage or auto loan, the funds will stay with the financial institution and be applied directly to your payment.
You’ll use the funds on qualifying expenses, and then make the monthly payments when they are due.
Where to get installment loans?
Where to get an installment loan depends on the type of loan you’re going to get. For example, student loans can come from private lenders, or you can apply for federal student loans offered by the government.
For most loans, like personal loans, auto loans, and mortgages, you have three options: Banks, credit unions, and online lenders.
- Banks may be best for those with excellent credit, or who are already bank customers. They typically have the strictest requirements and may not offer all types of installment loans. Their interest rates may also be higher than other options.
- Credit unions may be best for those with decent credit who are looking for lower interest rates, but most credit unions require you to be a member to get financing.
- Online lenders are the most flexible with credit scores and income requirements, and likely have the fastest application, approval, and funding process. You may also qualify for a lower interest rate if you have excellent credit.
Other types of installment loans
There are a few different types of online installment loans to be aware of when considering the best loan for your needs:
1. Personal loans: Personal loans are one of the more common types of installment loans. With loan amounts ranging from $1,000-$100,000 and APRs ranging anywhere from 6-36%, personal loans can be a versatile type of installment loan for a range of purposes.
2. Auto loans: Securing an auto loan is one of the most common methods by which a person finances a vehicle. To do so, you can work with a bank or the in-house lender at the car company to borrow the money to pay for the vehicle and begin making monthly payments to repay the cost.
3. Mortgage loans: Very few people have enough cash on hand to outright purchase a home, which is where a mortgage loan comes in handy. This type of installment loan is used to help homeowners acquire homes. Then, the homeowner makes mortgage payments to the lender on a monthly basis.
4. Student Loans: Student loans are another type of installment loan. Unlike other types of loans on this list, some student loans don’t require monthly installments until after you graduate from school.
5. Secured installment loans: Secured installment loans are loans in which a lender requires the borrower to put up collateral to “secure” the borrowed amount of money. If you are unable to repay the loan, part or all the collateral may be given to the lender.
6. Unsecured installment loans: Unsecured installment loans don’t require collateral. They work the same as personal loans but typically have smaller loan amounts to be used for smaller expenses.
It’s important to note that installment loans come with variable or fixed interest rates. A variable interest rate means that, as time goes on, the interest rate you pay may change. Variable-rate installment loans are generally riskier than fixed-rate loans, as you do not fully know how much interest you will have to pay throughout the repayment period.
Related: Types of Personal Loans
Who are installment loans best for?
Installment loans typically have lower interest rates than credit cards and can be a better option than other loans (such as payday or pawn loans). If you are making a large purchase, like a home or car, needing to fund secondary education, or need personal loan funds for something else, an installment loan may be an option.
However, it’s important to remember installment loans are a type of debt, so you should have enough income to repay the loan each month. You should also have good to excellent credit in order to get the lowest interest rate possible.
If you need funds for a purchase or other financing, be sure to compare all of your options including interest rates, fees, and monthly payments to find the best option for you.
When is an installment loan a good idea?
There are several instances where an installment loan can be an excellent idea. When you are attempting to manage debt, consider using an installment loan for the following situations:
- Emergency Expenses: When expenses are knocking at the door and you don’t have the funds needed, it can be a worrying experience. Whether it’s medical expenses, car repairs, or something else pressing, paying for your emergency expenses with a small loan can help.
- Necessary Repairs: Home repairs can quickly climb in cost beyond what you have stored in your savings. Handling these repairs with an installment loan can be an excellent way to meet this financial obligation.
- Consolidating Existing Debt: If you have large amounts of debt with other lenders and several different interest rates, consolidating your debt into one loan can help you control your debt.
All the above instances are great examples of when you should consider an installment loan, but judge the decision based on your own personal reasoning.
Pros and cons of installment loans
On the plus side:
Installment loans can cover large purchases
Monthly payment amount stays the same assuming a fixed interest rate
Installment loans can be paid off earlier which can save money on interest charges
The drawbacks:
The temptation to borrow more than necessary
High risk of impact to credit score in the event of no repayment
You can’t add funds to the original amount borrowed
Loan terms are largely based on credit history
Alternatives to installment loans
- Credit cards: Credit cards may have higher interest rates than loans, but if you’re able to repay the card in full each month and avoid carrying a balance, you won’t accrue interest. Consider using a cash back credit card to make the most out of your spending.
- No-credit-check loans: These types of loans, which can include payday loans and car title loans, should be considered a last resort. While they won’t check your credit score, which means you won’t see a decrease in your score from a hard credit check, these loans typically have extremely high interest rates and fees, and come in smaller amounts. Plus, most are secured, and you risk losing the asset if you don’t repay the loan in the designated term.
- Payday alternative loans: Credit unions often offer this option for borrowers with bad credit. While you have to be a member, these loans allow you to borrow small amounts of money at a lower cost, and have a longer period of time to repay the loan.
Examples of installment loans
To further understand installment loans, let’s look at a common example: auto loans. As mentioned earlier, for those wondering is an auto loan installment or revolving, it is indeed installment. Say you got to a dealership and see a $20,000 car you wish to purchase. You likely don’t have the cash on hand, but you do have $5,000 you can put down today.
Therefore, the lender offers you the following:
$15,000 principal
4-year repayment
4.5% interest rate
By using this loan payoff calculator, you can see that your monthly payments would come to $342.05. Auto loans are certainly one of the most common installment loans seen today. The main difference between these and revolving loans is that you receive the $15,000 up front, whereas someone with a $15,000 credit limit may spend $1,000 in a month, and when they pay it back, they will have access to a full $15,000 again.
Secured vs. unsecured installment loans
| Secured installment loans | Unsecured installment loans |
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Typically, your credit score, history, income, and other factors determine whether you’ll qualify for an unsecured or secured loan. If you’re considered a riskier borrower, you may only qualify for a secured loan. However, remember that if you default on the loan, you risk losing the asset you have as collateral, so it’s important to make the loan payments on time every month.
Related: Secured vs. Unsecured Personal Loans
How installment loans affect your credit?
All forms of borrowing can have an impact on your credit, but installment loans can sometimes have a larger impact due to their size. In the event you can pay your installment loan off on-time, every time, then your credit score will benefit. However, defaulting on the loan or failing to make payments can cause considerable damage to your credit score.
Before taking on any installment loan, make sure you have a plan in place for repayment and that you will be able to make the payments in the amount agreed upon with the lender.
Installment loans for bad credit
Installment loans for bad credit do exist, but the interest rates and principal amounts typically aren’t favorable for the borrower. As mentioned, one of the downsides to installment loans is the reliance on credit score as a factor in whether you are approved. For those with credit scores below 600, there may be lenders who will look at bank transactions, employment, established history, or other factors when considering whether you’re qualified for the loan.
In most cases, credit lenders and third-party online lenders are those most likely to work with people who have less than perfect credit scores. Don’t settle for an incredibly high interest rate when seeking out an installment loan if you have less than perfect credit. Take the time to build a strong credit history through lower risk borrowing strategies, such as lines of credit or credit card accounts with 0% APR, to earn a lower rate.
Pros and cons of installment loans for bad credit
| Pros | Cons |
|---|---|
 Funds for whatever you need |  High APR |
| Ability to build credit score | Can negatively affect credit score |
| Flexibility | More difficult to qualify |
| Higher borrowing limits | Collateral or cosigner may be required |
| Fees and penalties can be high |
How to qualify for an installment loan?
The type of loan you get and the lender you borrow from can influence factors taken into consideration when qualifying. For example, mortgages may require higher credit scores. Or, online lenders may have more flexibility with income and credit score requirements.
However, the steps to qualify are typically the same:
Check your
credit score
Shop around
for the best lender
Fill out an application
for approval
Submit your
application
How to compare installment loan lenders?
When figuring out which lender is best for you, there are a number of factors to compare including:
- APR, which is the interest rate + fees you’ll pay on the principal loan amount.
- Fees and penalties, like origination fees, late payment fees, prepayment penalties, and others.
- Monthly payment
- Term, which is how much time you have to repay the loan. While longer loans mean smaller monthly payments, it also means you’ll accrue more in interest. Shorter terms have higher monthly payments but you’ll owe less over time.
- Customer service ratings and reviews from past and current customers.
- Loan amounts because you’ll want to ensure the lender offers loans in the amount you need.
- Loan requirements like income, credit score, and other requirements.
If you can, get prequalified for the loan. This can be done online and it doesn’t affect your credit score, but gives you a more unique estimate of the loan amount, term, APR, and monthly payment you’d qualify for. It’s not a guarantee, but it can help you more accurately compare.
How do I apply for an installment loan?
To apply for an installment loan there are a few steps you should first follow:
1. Identify the type of loan you need:
Whether you are seeking a new car, trying to get a mortgage, or need $1,000 for personal expenses, the first step in getting an installment loan is identifying what you need.
2. Apply for installment loan:
After deciding what you need an installment loan for, research the lenders in your area who offer this loan. Whether it is a car dealership, bank, or other institution, always do proper research to ensure you receive the best interest rate. When filling out the loan, you will need to provide both personal and financial information such as your name, salary, date of birth, and more.
3. Discuss terms with the lender:
The factors you will discuss with a lender include but are not limited to: principal of the loan, tenor for repayment, interest rate, and monthly payment amounts.
4. Receive funds, make purchase, and begin repayment:
After agreeing to all terms and being approved, you will be granted the loan amount and your purchase can go through. At that point, all you need to do is make payments on time monthly for the agreed upon amount.
FAQs
No-credit-check loans, like payday loans or car title loans, do not require a credit check to qualify. In most cases they are considered a type of installment loan because they are repaid over time with interest. However, interest rates are typically significantly higher than other types of loans and loan terms are much shorter, typically ranging from a couple of weeks to a couple of months.
You can take out an installment loan like a personal loan to consolidate debt. You’d use the debt consolidation loan funds to pay off your outstanding debt, and then make monthly payments toward the new consolidation loan.
Payday loans are technically a type of installment loan, but have higher interest rates, shorter payment terms, and no credit check required.
Yes, you can have multiple installment loans. For example, someone may have a mortgage, auto loan, and student loans. Or, they could have two personal loans. While you can technically have as many installment loans as you want, remember you’ll be paying interest on the principal balance and the more debt you have, the more difficult it can be to qualify for additional financing. Plus, it will impact your credit score.
For those unfamiliar with the term, online installment loans are a specific type of loan that you get online. Once you receive your loan balance, you repay the loan over time monthly in fixed payments known as installments. These repayments could continue for a few months to a few years depending on the type of loan you get.
The primary benefit to using an online lender is the speed of the application, approval, and funding process. In some cases you may be able to get your funds within one or two business days. The repayment process is also often more streamlined. Working with an online lender is also more convenient because you can apply, manage, and repay your loan without leaving your house.
Whether you’re applying for an installment loan online or in person, you’ll want to consider some of the same factors such as your credit score and history, the lender’s minimum requirements, minimum and maximum loan amounts, APR, fees, repayment terms, and customer service. For online lenders specifically, you’ll also want to make sure they are trustworthy, licensed, and accredited.