Installment loans are loans that borrowers repay in multiple payments, which are called installments. These loans include mortgage loans, car loans, student loans, and personal loans. Most installment loans come with fixed payments over the life of the loan. However, some do have variable interest rates and the amount can change over time. If you want to make a big purchase but can’t afford all of it at once, an installment loan may work for you.
The phrase “installment loan” is a technical term that, though you may not be familiar with it, actually describes something most people have either used or heard about. If you don’t have one already, chances are you will get one soon because installment loans are one of the most common types of loan around.
Let’s say you’re in need of a new car, a home, or a vacation, but you can’t afford it now. An installment loan allows you to get the money now then pay it back over time.
What is an installment loan?
An installment loan is any type of loan where the borrower agrees to repay the borrowed money in multiple payments.
It is sometimes used as a synonym for personal loans, but it can refer to any loan that is paid in multiple installments. These payments are usually made in monthly installments, but they can follow any regular schedule.
With installment loans, your monthly payments will generally be the same each period. The amount is based on the interest rates and principal balance.
Installment loans can be secured, like a mortgage or an auto loan, or unsecured, as with a personal loan or signature loan. If it’s secured, the property you are taking the loan out on is usually held as collateral. So, for example, if you take out an installment loan on a car and fail to make the car payments, the car could be taken away from you.
Five types of installment loans
There are many different types of installment loans, and you’ve probably heard of most of them. Auto loans, personal loans, mortgage loans, payday loans, and student loans are the most common examples of installment loans.
One common type of installment loan is an auto loan. You use an auto loan to purchase a car or other vehicle. Your car serves as collateral for an auto loan and can be taken back if you do not make your monthly payments on time.
Auto loans: additional reading
Here are a couple of articles worth reading if you’re considering or already have a car loan:
- How Many Car Payments Can You Miss Before Repossession? This article will tell you how many installment payments you can miss, if any, before you lose your vehicle. It will also tell you other useful things to know if you’re considering a car loan or at risk of falling behind on car-loan payments.
- Should You Pay off Your Auto Loan Early? If you’re flush with cash and thinking about paying off your auto loan early, take a look at this article to see if doing so is a good idea.
You use mortgage loans to purchase some form of property. Your property serves as collateral in a mortgage loan. As with auto loans, if you do not make on-time payments on your mortgage, your property can be taken away from you.
How mortgages do and don’t resemble auto loans
The type of mortgage loan that most resembles an auto loan is a chattel mortgage. Because the personal or chattel property is not subject to special laws governing real estate, properties secured by chattel mortgages can be repossessed just like automobiles.
Mortgage loans on real property, in contrast, must go through a foreclosure process. In all but a couple of U.S. states, this process bears little resemblance to repossession. Your property still acts as collateral, and you can still lose it, but your lender will never be able to legally come out and seize the property as lenders can do with repossession.
Here are some SuperMoney articles that address this and related topics, in case you’re curious:
- Complete Mortgage Guide. This is SuperMoney’s one-stop summary of all the essential facts about mortgages. Take some time to review it if you’re getting ready to shop for a mortgage.
- How Long After a Car Repossession Can I Get a Mortgage? When you lose mortgaged real property in the United States, it doesn’t usually resemble repossession. Repossession of real property does happen enough in other parts of the world to have prompted some questions about it. This article touches upon those while discussing the effects of car repossession on your prospects for a mortgage loan.
- The Differences Between Conforming Loans and Non-Conforming Loans. Three essential concepts you should master before or during your search for a mortgage loan are these: conforming loans, nonconforming loans, and qualified mortgages. This article addresses the first two.
- What Is a Chattel Mortgage? This is the type of mortgage that most resembles a car loan. If you finance a mobile living space with a chattel mortgage, failing to make your payments could get your living space repossessed. Read this article to learn more.
- Should You Pay Off Your Mortgage? Pros and Cons. Well, should you? Read this article to help you decide.
- What Is a Conforming Loan? Another look at the “three essential concepts” mentioned above. This article unpacks one of the three in great detail.
- What is a Qualified Mortgage? Another article in the “three essential concepts” trilogy. This covers the last topic and concludes your basic training in these essentials.
If you need a loan fast, a payday loan could seem like an appealing option. Borrowers generally have around 14 to 30 days to pay the loan back. Other installment loans like this have a repayment period of three to 12 months.
A personal loan can be used to cover a wide range of costs. One may use personal loans to cover home renovations, medical expenses, weddings, and more. Several types of financial institutions, such as banks and credit unions, give out personal loans.
Did you know that personal loans can be used to buy a home? While traditional mortgage loans work best in many situations, a personal loan could be a better fit for you.
You take out student loans when you’re interested in receiving a higher education but cannot afford it. Private lenders and the government provide student loans.
Installment loans and your credit score
Your credit score will often determine whether you qualify for an installment loan and what rates you are offered. As your credit score goes down, your interest rates go up. It is usually more difficult to get an installment loan with a poor credit score.
However, using an installment loan can also improve or damage your credit score. Generally, if you make your monthly payments on time, your credit score and credit history will improve.
If you want to improve your credit score, make sure you get an installment loan from a lender that reports to all three major credit bureaus, such as the examples below.
Using payday loans and check-cashing loans can lower your credit score, even if you make on-time payments. Some smaller financial organizations don’t report on-time payments. This means they won’t show up on your credit report. While this won’t hurt your credit score, it won’t help it either.
Pros and cons of installment loans
Every type of loan has its advantages and disadvantages. Here are a few to consider when deciding if an installment loan is best for you.
- Fixed payments. Fixed payments mean you’ll be paying the same amount each month. This makes budgeting a lot easier. If you’re on a tight budget, you can choose to pay off the loan in a longer amount of time. This lowers the monthly payments.
- Fixed interest rate. Although there are some variable interest installment loans, most have fixed interest rates. While a variable interest rate could change month-to-month, fixed interest rates mean you pay the same each month. Similar to fixed payments, a fixed interest rate makes budgeting easier. Not just that, if the market changes, your interest rate stays the same. You may end up paying less than others in interest at times. If you have the choice, choosing a fixed interest rate instead of a variable interest rate will usually prove the more prudent course of action.
- High credit limits. Installment loans allow you to borrow more than you could with a credit card loan. This is great when you need to make a large, pricey purchase.
- Fixed interest rates. There are definite advantages to having a fixed interest rate. However, if the market changes, your interest rate stays the same. That means, if the interest rates fall, you may be stuck with a higher than necessary rate.
- No flexibility with due dates. There is little to no flexibility as to when you make your payments. Missed or late payments negatively impact your credit report, history, and score.
A tip from the pros
Before you apply for an installment loan, be sure to research the best lenders available in your area. SuperMoney provides reviews and comparisons for many installment loans. Check out our complete guide to loans.
How do I apply for an installment loan?
Most installment loans require the following:
- Government-issued state ID or license
- Proof of income, such as bank statements or pay stubs
- Your personal banking information
- Social Security number
What is the difference between an installment loan and a regular loan?
“Installment loan” is a broad term that refers to any loan where borrowers have regularly scheduled payments.
Can you pay off an installment loan early?
Will an installment loan hurt my credit score?
Installment loans usually only hurt your credit score if you miss or make late payments. Some payday loans can hurt credit scores, but more often than not, installment loans help your credit score.
Is an installment loan the same as revolving credit?
Installment loans and revolving credit are two different things. Installment loans pay back a fixed amount within a certain time period. Revolving credit gives you a maximum borrowing limit. You can borrow as much or as little as you want from that line of credit. If you hit your credit limit, you’ll need to repay some or all of what you’ve borrowed before you can borrow more again.
- An installment loan is any loan paid back in consistent monthly payments.
- Installment loans include auto loans, mortgage loans, and personal loans.
- If you make your monthly payments on time, installment loans can benefit your credit score.
- Installment loans are great for those who are about to make a large purchase that they can’t pay for upfront.
Consider a personal installment loan to fund your new project
If you have an expensive purchase or project coming up that you could use a loan for, look into getting an installment loan. Personal loans can be used for a large variety of things, and SuperMoney has listed the best lenders for personal loans. Check out each one, and review the pros and cons to see which is best for you.
View Article Sources
- Different Types of Credit and How They Impact You — Utah State University
- Helpful background articles by companies in the personal loan and debt relief industries.
- The Difference Between Installment Loans and Revolving Lines of Credit — Clearview Federal Credit Union
- What is a federal direct loan? — Consumer Financial Protection Bureau (CFPB)
- What is a personal installment loan? — CFPB
- What is a signature loan? — Experian
- Can You Use A Personal Loan To Buy A House? — SuperMoney
- Complete Mortgage Guide — SuperMoney
- How Long After a Car Repossession Can I Get a Mortgage? — SuperMoney
- How Many Car Payments Can You Miss Before Repossession? — SuperMoney
- No Private Student Loan Forgiveness Options? Here’s 5 Alternatives— SuperMoney
- Personal Loans Industry Study — SuperMoney
- Should You Pay off Your Auto Loan Early? — SuperMoney
- Should You Pay Off Your Mortgage? Pros and Cons — SuperMoney
- The Differences Between Conforming Loans and Non-Conforming Loans — SuperMoney
- What Is a Chattel Mortgage? — SuperMoney
- What Is a Conforming Loan? — SuperMoney
- What is a Qualified Mortgage? — SuperMoney
Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.