Installment Loans: How They Work And If They're Right For You
Victoria Araj5-Minute Read
PUBLISHED: August 11, 2023
An installment loan allows you to repay your debt through a fixed monthly payment over a fixed term. You receive the funds at one time in a lump sum, and you’re required to repay the loan with a regular payment schedule.
Let’s take a closer look at how installment loans work.
Installment Loan Definition
As just mentioned, an installment loan allows you to borrow a lump sum of money and repay it over a defined period of time in fixed amounts. Installment loans are sometimes called installment credit.
You can easily factor this predetermined monthly payment into your budget. Be mindful of the repayment timeline, however. An installment loan can allow you to make a major purchase right away, and you should consider how another payment can impact your monthly budget.
Examples Of Installment Loans
Installment loans include:
- Personal loans: A personal loan is a type of installment loan you can use for almost anything you need. Upon approval, you receive the loan in a lump sum and pay it back over the set repayment period. Personal loan amounts typically fall in the $1,000 – $50,000 range.
- Mortgages: Mortgages are larger loans used for home buying. Mortgage repayment periods are typically 15 or 30 years unless you pay the loan off early.
- Auto loans: Auto loans are typically used to purchase vehicles. The standard repayment period for an auto loan is 60 months. Going up to a 72-month loan or one even longer can raise the amount of interest you pay on the loan over time.
- Student loans: Student loans can help pay the costs of a higher education. Repayment periods typically begin after the student’s graduation. Interest rates and terms can vary between federal and private loans.
How Do Installment Loans Work?
When you seek out an installment loan, you apply for a set amount of money and 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 loan amount 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 requires some type of collateral. For example, if you’re using an installment loan to buy a home, the home serves as collateral for the lender.
Collateral secures the loan, reducing the lender’s risk when lending you money. The value of your collateral acts as a recourse if you fail to make your payments. With a mortgage, for example, the lender can take possession of your home if you default on the loan.
What Is An Unsecured Installment Loan?
In other cases, you won’t have to put up collateral to secure your installment loan. For example, many types of personal loans don’t require collateral. Lenders take on more risk without collateral. They won’t have a way to recoup their losses if you’re unable to make your payments.
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. Installment loans such as auto and home loans have rules for how you can spend their funds. This isn’t the case for all types of installment loans.
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 if you have the ability to repay it. Of the numerous installment loan options, personal loans can offer the fastest funding. Personal loans usually take 1 – 7 business days for approval and disbursal.
Rocket Loans℠ offers same-day funding for its personal loans. This means an approved borrower could receive their funds the same day they apply.1
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 want to fund a purchase such as a home or car, you should check out that specific option. If you’re looking for more flexibility, then a personal loan might be a better choice for you.
Once you decide which type of loan is most suitable, you should take time to shop for the right lender. Secure quotes from multiple lenders to find the best terms available. Always pay close attention to interest rates to ensure you don’t end up overpaying.
You should be able to narrow your search based on individual lender requirements. Many lenders require an active checking account as well as a minimum income and minimum credit score. 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 repay the loan 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 a low credit score may pay a higher interest rate.
- You can’t change the fixed loan amount if you borrowed too much or too little.
- Some installment loans include additional fees, and some may have prepayment penalties.
FAQs About Installment Loans
Below, we’ve answered a few questions people frequently ask about installment loans.
Can I find installment loans online?
Yes, many online lenders offer installment loans like personal loans. Applying online can often save you time and get you your loan faster.
What is an installment loan inquiry and will it affect my credit?
Although lenders have different requirements, you should expect some type of credit check. Lenders usually perform a hard inquiry to verify creditworthiness before finalizing a loan. A hard inquiry can lower your credit score, but the inquiry typically only stays on your credit report for about 2 years.
Installment loans vs. revolving credit: What’s the difference?
When you borrow funds, revolving credit and installment credit are two options.
With revolving credit such as a credit card, your monthly payments will vary in size depending on how much of the credit line you use. For this reason, revolving credit can feel more difficult to manage responsibly. Revolving credit funds also become available to use again as you pay your balance.
Installment credit, on the other hand, is one lump sum and requires you to repay a fixed amount each month.
Is a payday loan an installment loan?
A payday loan isn’t an installment loan. When you borrow a payday loan, you’re supposed to repay the loan in full by your next pay period.
Is an installment loan right for me?
Whether you should apply for an installment loan largely depends on your financial situation. For example, consider your credit score as you decide whether you should get a personal loan. If you have a good credit score, then a personal loan could be a great fit. If you have a lower credit score, you should weigh the price of the interest against your needs.
Repaying a loan through monthly installments can be preferable if you can’t afford to repay it in full all at once. Installment loans can enable you to make big purchases you couldn’t afford otherwise. Fixed monthly payments can also be easier to work into your budget.
Think a personal loan will suit your needs? Apply online today and see what rates you can qualify for.
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