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Education News Simulator Your Money Advisors Academy Table of Contents What Is an Installment Loan? The types of Installment Loans Secured vs. Unsecured Installment Loans Application for an Installment Lending Advantages and Disadvantages Installment Loans and Credit Scores The Bottom Line Credit & Debt Buy Now , Pay Later How do Installment Loans Work Flexible terms and low interest rates are among the installment loan advantages Written by J.B. Maverick Updated on May 20, 2022. Reviewed by Thomas Brock A factual check by Ryan Eicher An «installment loan» is a broad, general term used to describe the majority of both commercial and personal loans provided to borrowers. Installment loans encompass any loan which is repaid by regularly scheduled installments or regular payments. If you’re thinking of the possibility of applying for the installment loan there are pros and cons you need to take into consideration first. Here’s what you should learn before you apply for one. The most important takeaways Installment loans are personal or commercial loans that borrowers must repay via regular payments or installments. Each installment, the borrower repays a portion of the principal that was borrowed. It additionally pays an interest rate on the loan. The types of types of loans may include: auto loans, mortgage loans, personal loans and student loans. The benefits of loans that are installment loans include flexible terms and lower prices for interest. The disadvantages of installment loans include the possibility of non-payment and loss or collateral. What is an Installment Loan? An installment loan allows a person to borrow the amount they need to pay that has to be paid back in regularly scheduled installments. Every installment loan includes the repayment of a percentage of the principal amount borrowed, as well as the payment of interest for the debt. The primary factors that determine the size of each regular loan payment is your amount loan it, the rate of interest payable to the borrower and the term or length that is the loan. The amount of the regular installment usually due on a monthly basis is the same for the entire loan term, making it easy for the borrower to plan before making the needed payments. The majority of loan applicants must pay additional fees on top of interest charges, such as charges for processing applications, loan origination fees, or other charges such as late payment fees. Kinds of Installment Loans The most commonly used types of installment loans are auto loans that include mortgage loans, personal loans, and student loans. In addition to mortgage loans they are also variable-rate loans where rates of interest change throughout the duration of the loan Nearly all installment loans come with fixed rates loans in which the rate of interest charged during all the duration of the loan will be fixed from the date of borrowing. Secured vs. Unsecured Installment Loans Installment loans may be either secured (collateralized) or unsecured (non-collateralized). Mortgage loans are secured by houses that the loan will be used to purchase. The source of collateral on an auto loan is the vehicle purchased with the loan. Some installment loans (often known as personal loans) can be extended without collateral. These loans without the requirement of collateral are made based on the creditworthiness of the borrower, usually demonstrated by the score of their credit, and their ability to repay as proven by the borrower’s earnings and assets. The interest rates charged for a non-secured loan typically exceeds the rate in a comparable secure loan which is due to the greater chance of non-payment that the creditor accepts.1 If you’re contemplating taking out an installment loan it is advisable to first check out a personal loan calculator to determine what type of interest rate that you’ll be at a point to be able to afford. The process of applying for an installment loan A borrower seeks the installment loan by filling out an online application with the lender, which usually outlines the purpose of the loan like that of purchasing a vehicle. The lender discusses with the borrower numerous options concerning questions like down payment, the time frame of the loan and the payment timetable as well as the total amount to be paid. If an individual wants to borrow $10,000 to finance the purchase of a car for instance, the lender informs the borrower that having a greater down payment could lead to the lowest interest rate or that the borrower may receive lower monthly payments getting a loan for a greater duration. The lender also checks the creditworthiness of the applicant to determine the amount of credit available and what loan terms they are willing to grant. The borrower generally retires the loan through the necessary payments. Borrowers typically save charges on interest by settling the loan at the beginning of the time period stipulated in the loan agreement. Some loans impose prepayment penalties if the borrower settles the loan in advance. Advantages and Disadvantages Installment loans are flexible and can be customized to the borrower’s wants in regards to the loan size and the amount of time that best matches the borrower’s ability to pay the loan. These loans permit the borrower financing with a considerably lower rate of interest than is normally offered with credit cards which includes credit cards. The borrower will have cash on account to use for different purposes, as opposed to making an outlay of cash that is large. Pros The ability to finance large purchases The amount for payment is usually the same throughout the loan period It is generally possible to save the interest cost by paying off loan in advance Cons Loan fees can be costly. Credit damage can occur as a result of missed or late payments Potential to borrow more than the amount needed For longer-term loans however, the drawback is that the borrower may be paying a fixed-interest loan at a higher interest price than the market rate. The borrower might be able to refinance the loan at the more affordable interest. The primary drawback to an installment loan comes from the borrower being locked into a long-term financial obligation. There will come a time when circumstances may render the borrower incapable of paying their scheduled bills or in the event of default, they risk eventual loss of any collateral used to secure the loan. Installment Credit Scores and Loans Making sure you pay off your installment loan punctually is an effective method to build your credit. The history of your payments is the most important element that influences your credit score. A long-running track record of responsible and responsible credit use will improve your credit rating.2 As I mentioned before, your credit score can suffer if don’t pay on time or default on the loan. It’s also a red flag to the eyes of lenders. The Bottom Line An installment loan can assist you in financing any major purchase, such as a new car or house. Like every loan, there are advantages and disadvantages to take into consideration. Advantages include flexible terms along with lower interest rates. However, one of the main disadvantages is the danger of default. If you’re looking to take out an installment loan be sure to check rates and terms provided by lenders prior you sign on the dotted-line. Article Sources Related Articles Man looking over papers Personal Credit Payday Loans and. Personal Loans What’s the difference? Small red house , with money hanging out such as tape floating from a dispenser set on a flange of $100 bills. Home Equity HELOC vs. Home Equity Loan. HELOC: What’s the Difference? Model of a house made on a calculator Mortgage Mortgage Calculator Personal Lending Are personal loans considered income? Bills loom on man’s wrists 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 Simple Interest Definition: Who Gains With Formula and Example Simple interest is a straightforward method of calculating the interest cost on a loan. More Signature Loan An signature loan is a type of personal loan made by banks as well as other finance companies based solely on the signer’s signature and guarantee to pay collateral. more Subprime Auto Loan This type of loan is a type of loan designed to fund cars that are offered to those with poor ratings on their credit scores, or who have limited credit histories. more What is a Mortgage? Types, their workings and examples A mortgage is a loan intended to purchase or keep real property. More «Default: What it means What can happen when you are in default, some examples A default occurs when a borrower fails to make the necessary payments on a debt, regardless of the amount, such as interest or principal. more What Is an Amortization Schedule? How do you calculate it using Formula An amortization chart is a detailed set of regular blended loan payments that indicate the amount of principal and the amount of interest. more
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