What Is An Installment Loan?
4-Minute ReadSeptember 06, 2022
An installment loan allows you to repay your debt through a fixed monthly payment over the course of a fixed term. You'll receive the funds at one time in a lump sum, and you'll be required to repay the loan with a regular payment schedule.
Let's take a closer look at how installment loans work.
Installment Loan Definition
When you’re looking to borrow funds, revolving credit and installment credit are the two available options. Installment credit is like a personal loan: you’ll repay your loan over a defined period of time in predetermined amounts. You’ll be able to easily factor this steady monthly payment into your budget.
An installment loan allows you to borrow a lump sum of money and pay it off over a defined period of time in predetermined amounts. You'll be able to easily factor this steady monthly payment into your budget.
When you're looking to borrow funds, revolving credit and installment credit are the two available options. With revolving credit, such as a credit card, you can expect to have monthly payments of various sizes depending on how you use it. Because of this, it can feel more difficult to manage revolving credit responsibly.
Other types of loans may require full repayment by a certain date. Payday loans, for example, are meant to be paid in full by the borrower’s next payday.
Examples Of Installment Loans
A few examples of installment loans include:
- Personal loans: A personal loan is a type of installment loan that can be used for almost anything the borrower needs. Approved borrowers will receive the loan in a lump sum and pay it back over the set repayment period. Loan amounts for personal loans typically fall between $1,000 and $50,000.
- Mortgages: Mortgages are larger loans used for home buying. Repayment periods for mortgages are typically 15 or 30 years, unless the borrower pays the loan off early.
- Auto loans: An auto loan is used to purchase a vehicle. The standard repayment period for an auto loan is 60 months. Going up to a 72-month loan or more can raise the amount you’ll pay in interest.
- Student loans: Student loans can help pay for higher education and typically begin their repayment periods following the student’s graduation. Interest rates and terms can vary between federal or private loans.
How Do Installment Loans Work?
When you seek out an installment loan, you apply for a set amount of money. You'll then repay that loan principal, along with interest, on a monthly basis. By the end of the loan term, you're expected to repay the total amount of the loan, plus interest.
Your rates can differ depending on certain factors, such as if you have a secured or unsecured loan.
What Is A Secured Installment Loan?
In some cases, an installment loan will require some type of collateral. For example, if you're using an installment loan to buy a home, then the home will serve as collateral for the lender. With collateral, a lender reduces the risk of lending you money because the value of your collateral will act as a recourse if you can't make your payments. With a mortgage, the lender could take possession of the home if a borrower defaults.
What Is An Unsecured Installment Loan?
In other cases, you won't have to worry about putting up collateral to secure your installment loan. For example, many types of personal loans don't require collateral. Without the requirement for collateral, the lender is taking on more risk since they will not have a way to recoup their losses if you’re unable to make your payments.
You'll need to pay attention to the monthly loan payment timeline. Although an installment loan can allow you to make a major purchase right away, you should consider the impact on your monthly budget before signing on the dotted line.
When Should You Consider An Installment Loan?
Taking out an installment loan could be a good idea if you’re in either of the following situations:
1. You Need To Fund A Major Purchase
An installment loan can be a great option when planning something big. Although some installment loans such as auto loans or home loans have rules for how you can spend the money, that's not the case for all types of installment debt. For example, many personal loans offer a variety of uses such as funding a wedding or consolidating debt.
2. You Need A Lump Sum Of Cash Upfront
If you need a certain amount of money right away, a personal loan can be a good option, depending on your ability to repay it. Personal loans can offer faster funding than other installment loans, usually 1 – 7 business days for approval and disbursal.
Rocket Loans℠ offers same-day funding for its personal loans, meaning an approved borrower could receive their funds the same day they apply.*
How To Get An Installment Loan
To get an installment loan, the first step is determining which type is right for your situation. If you're looking to fund a certain purchase such as a home or car, then you should check out those specific options. If you're looking for more flexibility, then a personal loan might be the better choice for you.
Once you've decided which type of loan is best for you, you should shop around for different lenders. Secure quotes from multiple lenders to find the best terms available. You should pay close attention to the interest rates attached to the loan to ensure that you aren't overpaying.
As you get quotes from lenders, you should be able to narrow your search due to individual lender requirements. Many will require an active checking account and a minimum income. Many will likely have a particular credit score in mind. Personal loans, for example, require a credit score of at least 650.
Pros And Cons Of Installment Loans
Installment loans can be a benefit for borrowers, but they’re not without their drawbacks.
- Installment loans make big purchases possible by allowing you to pay for them over time.
- Monthly payments are typically the same amount for the life of the loan.
- You can refinance some installment loans for better rates and terms.
- Borrowers with low credit may pay higher interest rates.
- The loan amount is fixed and can’t be changed if you borrowed too much or too little.
- Some installment loans include additional fees, and some may have prepayment penalties.
FAQs About Installment Loans
Can you find installment loans online?
Yes, installment loans like personal loans are offered by many online lenders. Applying online can often save you time and get you your loan faster.
Will an installment loan inquiry affect my credit?
Although each lender will have different requirements for their loans, you should expect that there will be some type of credit check. Typically, your lender will perform a hard inquiry to verify your creditworthiness before finalizing the loan.
Is an installment loan right for me?
Deciding if you should get an installment loan like a personal loan will largely depend on your current financial situation. If you have a good credit score, then a personal loan through an online platform like Rocket Loans could be a great fit. For those with a lower credit score, you should weigh the price of the interest against your current needs.
Repaying a loan through monthly installments can be preferable for those who can’t afford to pay a loan back in full. Installment loans can give borrowers the ability to make big purchases they couldn’t afford otherwise, and having fixed monthly payments can make it easier to budget, depending on the loan’s interest rates.
Think a personal loan will suit your needs? Apply online today and see what rates you can qualify for.
*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.
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