- Installment loans allow you to borrow money for big expenses and pay the loan off over time.
- Typically, the interest rate and monthly payment for installment loans are fixed, which can make it easier to budget.
- There are a variety 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. Like most financial decisions, getting an installment loan for the first time or taking on another is an important decision. 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 lending products that give you the ability to borrow a lump sum of money and pay it back in fixed monthly payments over a specified term.. The terms you qualify for, like the interest rate and the length of the repayment period, depend on several factors, including:
- The loan amount
- Your credit history and credit score
- If the loan is secured or unsecured (if collateral is pledged)
The most common installment loan is a personal loan. In addition, you might run into other types, including no-credit-check loans, mortgages, and auto loans.
What is the purpose of an installment loan?
Consumers may want 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?
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 receive 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?
An installment loan refers to any type of loan that’s paid off with set monthly payments over a loan term and some predetermined interest rate. A personal loan is 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 your default.
- Unsecured loans don’t require borrowers to secure their loans with collateral. Credit cards are a very common unsecured loan type.
Loans are secured or unsecured depending on the loan you choose, your financial health, and your lender.
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 of your loan, such as your interest rate and the length of your loan term, will depend on your total financial picture.
- 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 rate low, it does mean your home can go into foreclosure if you fail to make payments on time or at all.
- Student loans: As the name suggests, this type of installment loan can be used to pay for expenses related to a higher education program. You can get this kind of loan from a private lender or the federal government. The loan terms for your student loan depend on how you obtain the loan.
- 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 are laden with 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 first and only use a payday loan as an absolute last resort.
Should I get an installment loan?
Installment loans are generally quite flexible and can typically be tailored to your specific financial circumstances. Installment loans have certain advantages, but they have some disadvantages, too; it makes sense to 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 money to finance major purchases.
- Predictable monthly payments: 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 how much you’ll need to pay every month as well as when your last payment will be—this can make budgeting easier.
- Chance to refinance: 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 minimal 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, 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 – especially over time.
- 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.
How to get an installment loan
Before you get an installment loan, it’s important to do your research. This increases the likelihood that you’ll end up with reasonable loan terms.
1. Review lenders and application requirements
To ensure you’re getting the best installment loan, you need to shop around for a lender. Once you find a few that look promising, review their respective loan application processes 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 list the information they require on their website. If you can’t find it, be proactive in calling the lender to ask about their loan application.
When possible, get prequalified or preapproved by lenders you’ve researched.. This will help you understand what loan amounts, interest rates, and monthly payments for which you might qualify.. Additionally, lenders only run a soft credit check to get you an estimate when you prequalify, which—fortunately—doesn’t impact your credit score.
3. Compare your options
Once you research lenders and get prequalified, compare your options. Details you may want to keep in mind include:
- APR (annual percentage rate): The APR is the total cost of the loan, expressed as an interest rate inclusive of additional fees.The most affordable loan is typically one with the lowest APR.
- Fees: Some lenders charge fees, such as prepayment penalties, origination fees, and/or late fees. Review and understand any potential fees associated with your loan before signing up.
- Loan amount: Check the minimum and maximum loan amounts each lender offers to make sure your needs will be met.
- Credit score: Many lenders check your credit score and credit history to confirm your ability to pay back a potential loan. Check to see if the lenders you’re considering have a minimum credit score requirement. This can save time and headache down the road.
4. Select a lender and apply
After you weigh your options and select a lender, it’s time to apply for your loan. 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.If you have a low credit score, shop around and compare several options before making a final decision. Some lending marketplaces—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 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. Similar to brick-and-mortar lenders, some online lenders may require a minimum credit score.
However, some lending marketplaces, like Upstart, know you’re more than your credit score. Their model considers additional factors, such as your education¹ 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 to the purchase price of a new car. Then, you can finance the rest with a car or auto loan.
Is a mortgage an installment loan?
A mortgage is a popular type of installment loan used to finance a home purchase. Mortgage lenders typically require homeowners to pay back their loan within 15 or 30 years with a fixed (or variable) 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 encounter a financial emergency?
- Do you have enough money 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 for you. Getting an installment loan and using it responsibly can help you meet your financial goals and keep your credit healthy.
¹Neither Upstart nor its bank partners have a minimum educational attainment requirement in order to be eligible for a loan.