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.

What are installment loans?

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.

Types of installment loans

Given just how broad installment loans can be, there are many types. With that said, some of the most common types of installment loans are:

Personal loans Auto loans Mortgages Student Tuition loans Secured Installment loans Unsecured Installment loans
Personal loans Auto loans Mortgages
Student Tuition loans Secured Installment loans Unsecured Installment loans

While not a specific type of installment loan, it’s worth noting that some may have variable interest rates. This means that as time goes on, the interest rate you pay may change due to a number of factors. Variable rate installment loans are generally riskier than fixed rate loans, as you do not fully know what you will be paying back by the end of the repayment period.

The different types of installment loans vary from different forms of financing. As an example, for those wondering is a payday loan installment or revolving or is an auto loan installment or revolving, the answer is installment. A contract for an installment loan covers only the specified amount offered by the lender, whereas revolving forms of credit can be repaid and redrawn up until that specific amount.

How to get an installment loan

To apply for an installment loan there are a few steps you should first follow:

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.

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.

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.

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.

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.

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 greatly benefit. However, defaulting on the loan or failing to make payments can cause serious 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.

Personal 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.

Benefits & Drawbacks of installment loans

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

FAQs / Commonly asked questions about personal loans

Assuming you make all your payments on time and in full, installment loans will not hurt your credit score. The only time installment loans will result in a worse credit score in the long run is if you miss your payments or default on the loan in entirety.

Yes, personal loans are considered installment loans so long as the amount borrowed is given up front and in full. This differs from things such as personal lines of credit which allow a borrower up to a certain amount in funds, which gets replenished each time the borrower pays back what they owe for a period.