Disclaimer: The following content is general in nature and is provided for informational purposes only. Upstart is not a financial advisor and does not offer financial planning services. This content may contain references to products and services offered through Upstart’s credit marketplace.
- Installment loans allow you to borrow money from lenders for big expenses.
- Typically, the interest rate and monthly payments for installment loans are fixed, which can make it easier to budget.
- There are a variety of different types of installment loans, including personal loans, mortgages, and student loans.
Installment loans are incredibly common in the lending space. If you’ve borrowed money to buy a home, car or pay for an emergency expense, you may already have an installment loan. Just like most financial decisions, getting an installment loan for the first time or taking on another is an important decision and investment. Learning the basics about installment loans—how they work, the different types, and the pros and cons—can help you decide.
What is an installment loan?
Installment loans are a type of financial product that give you the ability to borrow a lump sum of money and pay it back in set monthly payments with a fixed interest rate over a period of time. The terms you qualify for, such as the interest rate and length of the repayment period, depend on several factors, which include:
- The loan amount
- The applicant’s credit history and credit score
- If the loan is secured or unsecured (if collateral is pledged)
There are several types of installment loans, including no-credit-check loans, mortgages, and auto loans. However, the most common type is a personal loan.
What is the purpose of an installment loan?
Consumers may want to get an installment loan because it can help them get the funds they need to make a big purchase. Plus, unlike some other financing options, installment loans give borrowers time to repay the loan over the course of a few months or years.
How do installment loans work?
In most cases, installment loans work the same way as personal loans. You can apply for an installment loan through a lender or lending platform. If you qualify, you’ll receive the loan amount all at once, sometimes by the next business day. After you get the loan funds, you’ll be required to start paying the lender back in monthly installments, over a set loan term.
All of your monthly loan payments will include a portion of the loan balance plus interest.
Installment loans usually have fixed interest rates and repayment schedules. So you’ll know from the start exactly how much you owe each month and when your loan will be paid off.
What is the difference between an installment loan and a personal loan?
Installment loans are any type of loan that’s paid off with set monthly payments over a loan term. Thus, personal loans are a type of installment loan.
What can installment loans be used for?
One of the most convenient aspects of installment loans is that they can be used for a variety of purchases. Some common uses for an installment loan include:
- A car purchase or a car refinance
- A house down payment
- For debt consolidation
- To help pay for special events, like a wedding
- For home improvement projects
- To cover emergency expenses, like medical bills
Examples of installment loans
There are many different types of installment loans, and they can either be secured or unsecured.
- Secured loans require collateral, an asset you own that the lender can use to back up the loan. If you miss too many payments, the lender can claim ownership of the asset to compensate for unpaid payments.
- Unsecured loans don’t require borrowers to secure their loans with collateral.
Loans are secured or unsecured depending on the loan you choose, your financial health, and the lender you choose.
Common types of installment loans
- Personal loans: Personal loans can be used for a variety of needs, like debt consolidation, unexpected expenses, or special events. You can apply for personal loans at traditional financial institutions, like banks and credit unions, or through online lenders. The terms you qualify for, such as your interest rate and the length of your loan term, will depend on your financial situation.
- Mortgages: You can use a mortgage to help you pay for a house. With this type of loan, your home is used as collateral. Although this helps keep your mortgage interest rates low, it does mean your home can go into foreclosure if you have too many late payments.
- Student loans: This type of installment loan can be used to pay for a higher education program. You can get this kind of loan from a lender or the federal government. The loan terms for your student loan depend on where you get the loan from.
- Payday loan: A payday loan is a type of installment loan that some borrowers use as a last resort to help them make ends meet until their next paycheck. These types of loans may sound like a solid option, but they typically have very high interest rates and additional fees. It’s easy to get stuck in a cycle of debt if you use this type of loan. So consider other financing options before you use a payday loan.
Should I get an installment loan?
Installment loans are a flexible financing option and can typically be tailored to your specific financial needs. Installment loans have certain advantages, but they have some disadvantages, too. You should consider the pros and cons of an installment loan before you make a final borrowing decision.
Pros of installment loans
- Ability to pay for big expenses: If you qualify for an installment loan, you can get quick access to a large amount of funds to finance major purchases.
- Consistent monthly repayments: Because installment loans usually have fixed interest rates and repayment terms, your monthly payment will remain the same over the life of the loan. This can help you determine when your last payment will be, which can make budgeting easier.
- Chance of refinancing: You can refinance your installment loan if interest rates decrease or your credit score improves. If you’re able to refinance with favorable terms and little to no fees, you could lower your monthly payments or shorten your repayment period.
Cons of installment loans
- Inability to increase loan amount: Once you borrow a set amount of money from the lender, it’s unlikely you’ll be able to increase your loan amount at a later date.
- Possible long loan term: Some lenders grant installment loans with long repayment terms. If you get a long loan term, it may cost you a lot in interest over the life of the loan.
- You may get a high interest rate: If you have a low credit score and outstanding payments on your credit report, lenders may have a hard time trusting you to repay your debt. This can hurt your chances of getting favorable terms. One of the most important terms your credit can impact is the interest rate. Even if you qualify for an installment loan, the interest rate may be high, which might not be worth it.
How to get an installment loan
Before you get an installment loan, it’s important to do research and take steps that’ll get you a loan that fits your financial goals and budget.
1. Research lenders and application requirements
To ensure you’re getting the best installment loan possible, you need to shop around for different lenders. Once you find a few that look promising, review their loan application process and requirements. Lenders may require:
- Proof of income
- Debt-to-income ratio
- Personal details, like your social security number
Some lenders or lending platforms may have this information on their website. If you cannot find it, call the lender and ask.
When possible, get prequalified or pre-approved by lenders you’re interested in. This will help you understand what loan amounts, interest rates, and monthly payments you can possibly qualify for. Additionally, lenders only run a soft credit check to get you an estimate when you prequalify, which doesn’t impact your credit score.
3. Compare your options
Once you research lenders and get prequalified, compare your options. Consider the estimates you prequalified for and the benefits each lender offers. Details you may want to keep in mind include:
- APR (annual percentage rate): The APR is the total cost of the loan, including the interest rate plus additional fees. The most affordable loan is typically one with the lowest APR.
- Fees: Some lenders charge fees, such as a prepayment penalty, origination fee, or late fee. Check what fees each lender you’re considering charges before you decide.
- Loan amount: Check the minimum and maximum loan amounts each lender offers to make sure it’ll fit your financial needs.
- Credit score: To confirm a potential borrower’s eligibility, some lenders will check their credit score and credit history to confirm their ability to pay back the loan. To save yourself time, check if the lenders you’re considering have a minimum credit score requirement.
4. Select a lender and apply
After you weigh your options and select a lender, it’s time to apply. Prepare by collecting the documents you need, such as your W-2, paystubs, and bank statements. Once you submit your loan application, the lender will do a hard credit check. As a result, your credit score will drop a few points temporarily. Once they make you an offer, review it thoroughly before you accept it.
Pro tip: You don’t always need a “good” credit score to get an installment loan. Some lenders offer installment loans to borrowers with “bad credit.” If you have a low credit score, shop around and compare several options before making a final decision. Some lenders, like Upstart, consider more than your credit score when determining loan terms.
Installment loan FAQs
What is an online installment loan?
An online installment loan is an installment loan that you can get from an online lender. When you apply for an online installment loan, be sure to shop around and compare different lending options. To qualify for a loan with competitive terms, some online lenders may require a minimum credit score.
However, other lenders, like Upstart, know you’re more than your credit score. They consider additional factors, such as your education and employment, to help you get the rate you deserve.
Is an auto loan an installment loan?
Car loans and car loan refinances are two common types of installment loans. If you’re thinking of getting a new car, you can start by making a down payment or applying the trade-in value of your current car. Then, you can finance the rest with a car or auto loan.
Is a mortgage an installment loan?
Mortgages are a popular type of installment loan. Mortgages typically require homeowners to pay back what they borrowed to fund their home purchase within 15 or 30 years with a fixed interest rate.
The bottom line on installment loans
Getting an installment loan can be a smart financial move. However, it’s essential to consider your budget, what you need the funds for, and your options. Ask yourself questions like:
- Can you afford to make your monthly payments if you have a financial emergency?
- Do you have enough saved to help in this kind of situation?
By doing research and considering these questions in advance, you’ll be prepared to make the best decision possible. Getting an installment loan and using it responsibly can help you meet your financial goals and keep your credit strong.