What are Installment Loans?

When you are thinking about taking out a loan, you will come across many options. One of the options you are likely to come across is an installment loan. Installment loans are good financial tools because they can help with almost any use. You can take out an installment loan to buy a house, pay for student loans, pay for a car or as a personal loan. Before anything, it is important to understand what are installment loans.

What are Installment Loans?

Most people may ask: what are installment loans? An installment loan is a type of loan where you are given a specific amount that you must pay back over an agreed within a specified period. This is done in fixed payments, known as installments.

An installment can have a fixed payment amount or a variable interest rate. A fixed payment means the payment amount stays the same throughout the duration of the loan. The variable interest rate may change during the loan period (this usually applies to mortgages).

With an installment loan, you decide the exact amount of money you want before borrowing. This differs from revolving credit, which allows you to borrow money over and over again until you reach an agreed amount.

Installment loans can be used for anything, but many people use them for debt consolidation. This essentially makes them debt consolidation loans, which they use to pay off other debts that have a higher interest.

Types of Installments of loans

Installment loans are most often taken out by people looking to make large payments. To understand what installment loans are, it may help to know the types. These include car and property purchases, student loans payoffs or consolidate debts. Here are the types of installment loans you can get.

Personal Loans

Personal installment loans can be used for a wide range of purposes. They can be used to pay for unforeseen expenses, to consolidate debt or to pay outstanding debts. They can also be used to pay for vacations, weddings, and other personal expenses. Some people even use personal loans to pay off credit card debt.

Auto Loans

Auto loans are used by people to finance the purchase of a vehicle. These loans are usually approved when the borrower has good credit. They are repaid in installments over the course of years as agreed by the borrower and the lender.
Loans that have longer terms usually come with lower monthly payments but have high interest rates. This may result in the borrower paying more money to buy a car with a 36-month loan than a 24-month loan, even if their monthly payments are lower.

Home Loans

A home loan or mortgage is the most common type of installment loan. It is a loan people take to buy a house. In most cases, the lender requires the borrower to make a down payment of about 3-20 % of the total loan amount.
Just like with auto loans, the lender looks at a borrower’s credit score to determine the interest rate of the mortgage. Usually, mortgages are repaid over a 15-30 year period.
With mortgages, the interest rate is usually fixed and doesn’t change during the lifetime of the loan.

How an Installment loan Impacts Your Credit Score

When you take out a loan, it is recorded by a credit agency, such as Experian, Equifax or Transunion. These companies gather credit information from various lending institutions and compile it into a credit report.

Credit reports are used by potential lenders to understand your credit history. Your credit score from these reports is used to determine the terms of loans and if you should be given a loan or not.

If you make your payments on time and pay the agreed-upon amount in full, it will have a positive impact on your credit report. Ultimately, this improves your credit rating.

Installment loans can also improve your credit mix. Credit mix is the number of different types of loans that appear on your credit report. Lenders or credit agencies tend to favor credit histories with different loan types when deciding to extend a line of credit.

Advantages of Installment Loans

Installment loans have a number of advantages as compared to revolving loans. Some of the advantages include:

  • Most come with predictable payments. With fixed interest rates the payment will remain the same during the lifespan of the loan.
  • You can easily budget for the payment each month because of the predictable amount and schedule.
  • When looking at which loan to take out, you can select a loan plan that will not stretch your budget with monthly payments.
  • With installment loans, you are guaranteed that by a specific date, your debt will be paid off. As long as you stick to the installments required by the loan, you will pay the loan off during the agreed-upon period.

Final Thoughts

When looking to take out a loan, it is important to answer: what are installment loans? Installment loans are very good for people looking to make big purchases but do not have the cash to do so. They enable the borrower to pay back the loan on a monthly basis by paying a flat fee. Installment loans are mostly used for auto, personal and home loans.

These loans help people purchase things and make payments they normally can’t afford, making them something worth looking into for borrowers.

Quick Stats

Highest AmountLifeLoans - $40,000

Loan Terms up toQuickLoanLink - 7 years

Recommended income$2,000+ per month

Grace Chen
Article written by

Grace Chen

Grace Chen has 10 years of experience in the financial field and have been delivering excellent business content through her articles.

Grace graduated from the Haas School of Business, University of California and is currently the chief editor of Communicate Better where she has written and edited thousands of articles published in various media.