Education News Simulator Your Money Advisors Academy Table of Contents What is an Installment Loan? Different types of installment loans Secured vs. Unsecured Installment Loans Application for an Installment Lending Advantages and Disadvantages Installment Credit Scores and Loans The Bottom Line Credit & Debt Buy Now and Pay Later How do Installment Loans work Flexible terms and lower rates are among the installment loan benefits The work of J.B. Maverick Updated May 20, 2022 Reviewed by Thomas Brock In fact, Ryan Eichler has checked the facts. A “installment loan” is a broad, general term that covers the majority of commercial and personal loans available to borrowers. Installment loans include any loan which is repayable with regularly scheduled payments or installments. If you’re thinking about getting the installment loan there are pros and cons you need to take into consideration first. Here’s what you should consider before taking one out. Principal Takeaways Installment loans are personal or commercial loans which the borrowers have to pay back with regularly scheduled payments or installments. Every installment payment, the borrower has to pay back a part of the principal loan and additionally pays any interest due on the loan. An example of such types of loans includes auto loans, mortgage loans, personal loans as well as student loans. The advantages offered by an installment loans offer flexible terms as well as lower rates of interest. The disadvantages of installment loans include the risk of the loan being in default and losing collateral. What Is an Installment Loan? An installment loan allows a person to borrow the option of a predetermined amount that has to be paid back in regularly scheduled payments. Each installment loan includes the repayment on a portion of principal amount borrowed and also the amount of interest to be paid on the debt. The main elements that determine the exact amount for each regular loan payment include how much of the loan, the interest rate paid to the borrower as well as the length or duration of the loan. The regular amount for payment usually due on a monthly basis is the same throughout the loan term, making it easier for the borrower to plan in advance to make the required payments. Borrowers usually have to pay additional charges along with interest charges for example, processing fees for applications, loan origination fees, as well as other fees including late payment penalties. The types of Installment Loans Common types for installment loans are auto loans they include mortgage loans and personal loans and student loans. Other than mortgage loans as well as variable-rate loans in which the interest rate fluctuates during the period of the loan, nearly all loans that are installment loans can be considered fixed-rate loans which means that the interest rate charged over all the duration of the loan is fixed at 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 the property that the loan will be used to purchase. The primary collateral in an auto loan is the car that will be purchased with the loan. Some installment loans (often called personal loans) are extended without collateral requirement. Loans that are extended without the need of collateral are awarded based on the borrower’s creditworthiness usually portrayed through an average credit score, and the capacity to repay as indicated by their income and assets. The rate of interest charged on an unsecured loan is typically higher than the rate charged on a comparable secured loan that reflects the higher probability of non-payment, which the lender accepts.1 If you’re looking to take out an installment loan or a personal loan, you’ll want to check out a personal loan calculator to determine what kind of interest rate you’ll financially able to manage. The process of applying for an installment loan A person who wants to borrow an installment loan by filing an application with the lender. Usually, the application will specify the purpose of the loan that is, for instance, buying a vehicle. The lender will discuss with the borrower options with regard to aspects like down payment and the length of the loan as well as the payment schedule, and the payment amounts. If a person is looking to borrow $10,000 in order to finance to purchase a vehicle like a car, for example, the lender informs the buyer that making a higher down payment may result in a lower interest rate, or that the borrower may be able to pay lower monthly fees by taking out a loan for a long time. The lender also analyzes his creditworthiness to determine what credit amount and the loan conditions they are willing to offer. The borrower is typically able to retire on the loan when they make the required payments. Borrowers can usually save charges on interest by settling the loan prior to the expiration of the specified term within the loan agreement. Certain loans require prepayment penalties when one pays off the loan in advance. Advantages and disadvantages Installment loans are versatile and are easily customized to meet the borrower’s particular requirements with regard to the loan amount and length of time that is most appropriate to the borrower’s capacity to repay it. These loans permit the borrower to get finance at a lower interest rate than what is typically available through the revolving credit finance like credit cards. Thus, the person borrowing has more cash on reserves for use in other goals, instead of having to make a large cash outlay. Pros The ability to finance large purchases Payment amount typically stays the same throughout loan term It is normally possible to cut back on charges for interest by settling the loan in advance Cons High fees for loans are not uncommon. Credit damage can occur by late or non-payment payments Possibility of borrowing greater than For longer-term loans the disadvantage is that the borrower may be making repayments on a fixed-interest loan at a greater interest rate than the market rate. The borrower could be allowed to refinance his loan at the less-interest rate. The third and most significant disadvantage of an installment loan is the result of the loanee becoming a binder on a financial commitment. Sometimes, the circumstances could make the borrower incapable of paying their scheduled bills, risking default, and potential loss of any collateral that was used to fund the loan. Installment Loans and Credit Scores Paying off an installment loan at the time it is due is an excellent way to build your credit. Your payment history is one of the most important factor that can affect your credit score. A steady track record of good credit use is good for your credit rating.2 In the past, your credit score may be affected if don’t pay on time or you default on the loan. It’s also a red flag in lender’s eyes. The Bottom Line An installment loan can allow you to finance major purchases like a car or your home. Like every loan, there are advantages and disadvantages to take into consideration. The advantages include flexible terms and less interest, however, the main drawback is the possibility of default. If you are considering taking credit with an installment loan ensure that you check rates and terms provided by lenders prior signing the dotted paper. Article Sources Related Articles Man looking over papers Personal Credit Payday Loans and. Personal Loans What’s the Difference? Small red house with paper money leaking out with the look of tape from a dispenser, resting on a fan of $100 bills. Home Equity Housing Equity Loans vs. HELOC: What’s the Difference? Model of a House on a calculator Mortgage Mortgage Calculator Personal Credit Are personal loans considered to be income? Bills tower high on the man’s palm and the blue background of documents. Loans The best ways to borrow Money Two people working on papers together Student Loans Are Student Loans Amortized? Partner Links Related Terms The Simple Interest Definition: Who is the beneficiary, Through Formulas and Examples Simple interest is an efficient method of calculating interest charge on an loan. more Signature Loan The signature loan is a type of personal loan offered by banks and other finance companies that depend only on the signature of the borrower and the promise to pay collateral. more Subprime Auto Loan An auto loan is a type of loan designed to fund a car purchase that’s offered to people with low ratings on their credit scores, or who have limited credit experiences. More What is a Mortgage? The types, how they function and Exemples A mortgage is an loan that is used to purchase or maintain real estate. More Default: What It Means What Does It Mean, What Happens If You Fall into Default, Exemples A default occurs when a borrower is unable to pay the minimum amount due on a delinquent debt, whether interest or principal. More What Is an Amortization Schedule? How to Calculate Using Formula An amortization schedule is an entire plan of periodic blended loan payment schedules, which show the principal amount as well as an amount for interest. More
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