What is an Installment Loan?

Installment loans are a type of loan that allows borrowers to take a massive sum of money and repay the loan over time. Usually, the interest rate on installment loans is fixed, and the money is paid in installments each month.

People usually take installment loans for buying things that they cannot afford to pay in cash. Some other uses of installment loans include clearing debt and building credit. Installment loans have their terms and conditions laid out. The terms of the loan such as interest rate, the period of repayment, penalties for missing payment and the total amount are mentioned in the contract. Most small loans allow early repayment, but there are certain types of investments that carry a prepayment penalty. The contract of installment loans should be properly read before taking on the loan.

The most common sources of getting installment loans are banks and credit unions, and the investments include personal loans, auto loans, and mortgages. Auto loans and mortgages are loans that have a specific use whereas personal loans can be used in any way that the borrower sees fit. Some of the various applications of personal loans are clearing debt, building credit or financing everyday expenditures. Personal installment loans are more accessible to obtain by borrowers with low credit as they come as unsecured loans, meaning that there is no security backing the loan other than the promise of repayment. There are no physical assets such as houses or cars being put up to back the loan.


Personal installment loans are often confused with payday loans. Payday loans are for a smaller amount, have a shorter period of repayment and are cleared once via a lump sum amount. They also have much higher interest rates when compared with installment loans. Installment loans, on the other hand, are repaid part by part through small monthly payments.

Types of installment loans

There are three main types of installment loans - car or auto loans, mortgages and personal loans. Mortgage loans and auto loans require a good credit score from the borrower, and there is usually a thorough vetting process involved before the loan is given out. These loans are paid monthly through years or decades. Personal loans are easier to secure when compared with mortgage or auto loans, especially for low-income consumers but they generally have higher interest rates. Mentioned below is a brief overview of each type of installment loan.

Personal loans - These loans are usually taken to resolve any kind of outstanding debt or clear off their credit card bills. They can also be taken to finance weddings, expensive vacations or other kinds of miscellaneous personal expenses. Unlike payday loans which are only used during financial emergencies, personal installment loans are taken to take steps towards any kind of financial goal such as building credit. Consumers often choose to take personal installment loans instead of taking on more debt on their credit cards. The progressive repayment period and fixed interest rates make these kinds of loans very lucrative. However, one thing to be kept in mind regarding personal installment loans is that, for borrowers with poor credit ratings, the rate of interest can be quite high which can be more than that faced with credit cards.

Mortgages- These are the most popular type of long-term installment loans. Most home mortgage loans are taken for amounts greater than $100,000 and are typically repaid in 15 to 30 years. In most of these mortgage installment loans, the borrowers are required to make a down payment that covers about 3 to 20 percent of the loaned amount. The borrower's financial history and credit scores are analyzed to determine the rate of interest on these mortgage loans. For the year 2015, the median rate of interest for mortgage loans was around 4%.

Auto loans- Car installment loans or auto loans are taken by consumers to finance the purchase of new cars. Just like mortgage loans, these auto loans are paid back for years in fixed monthly installments. The approval for such loans is usually granted based on the borrower's credit rating. Collateral usually secures Both, mortgage and car loans and a fixed down payment. The collateral is a physical asset that is seized from the borrower if they are unable to or unwilling to pay the back the loaned amount.

The most common time periods for repayment of auto loans lie between 24 to 48 months. However, 72 and 84-month loans have also become quite popular. While these more extended periods result in lower values of monthly installments, the payment through 6 or 7 years usually results in the borrower paying much more than the actual cost of the car. Additionally, cars lose their value , unlike homes. Hence, monthly payments made for an older car results in the borrower paying more debt than the actual worth of their car. This phenomenon is known as "upside-down."


We hope this clears up installment loans. If you have any further questions please feel free to contact us and we will get back to you asap.


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