An installment loan is a type of loan that allows you to borrow a lump sum of money upfront and then repay it over time in scheduled, “installment” payments. Common examples of installment loans include personal installment loans, student loans, auto loans, and mortgages.
While all installment loans follow the same general format, they can vary quite a bit in their specifics. If you’re considering an installment loan, it’s a good idea to learn about all the options that are available before making a choice. In the article below, we’ll go into detail about types of installment loans, how installment loans work, and the pros and cons of taking out an installment loan.
How do installment loans work?
The installment loan process begins when you apply for a loan. Depending on the lender, the loan application will require information like your name, phone number, amount of money requested, and the reason for the loan. Additional documents such as pay stubs may also be required. Then, the lender will run a credit check to determine your credit h. If they feel that you are a good loan candidate, they will make you a loan offer. This offer will include the total amount of money for the loan, the interest rate, the monthly payment size and duration, and any fees related to the loan. If you accept the offer, you will then receive the loan money in a lump sum as soon as the same day. Once you have received the money, you will need to make biweekly or monthly payments to slowly pay it back. If you are late on payments, you may have to pay additional late fees. To recap, here’s how installment loans work:
- Apply for a personal loan with a bank or other lender
- A credit review takes place
- If approved, you will receive a loan offer
- Accept loan offer and pay any origination fee(s)
- Receive funds
- Begin making regular, scheduled payments to pay back loan + interest
Is an installment loan a good idea?
In some cases, an installment loan may be a great idea – it can allow you to pay for important things such as a car or vacation, and enjoy those purchases now without having to save up enough money to cover the total cost of the item before buying. But if you are unable to make consistent, timely payments, an installment loan can lower your credit score and result in costly fees. So, is an installment loan a good idea? It depends on your personal situation – you’ll want to weigh the pros and cons before taking out a loan:
| Installment Loan Pros | Installment Loan Cons |
| Allows you to pay for large expenses and have quick access to money in the event of an unforeseen circumstance. | Is a finite source of money – unlike a credit card, the money made available at the beginning of your installment loan is the entire amount you receive. |
| Provides a steady payment schedule and clearly defined dates when installments are due. | Can have long loan terms, meaning you may be committed to making payments for years. |
| If you make payments on time, can help you to build credit and improve your credit score. | If you fail to make your payments on time, you may be charged late fees and your credit score will go down. |
| When you choose a reputable lender, you won’t be subject to hidden fees, balloon payments, early repayment penalties or other predatory charges. | You will likely have to pay interest – and if you have a poor credit score and a long, many-year term for your installment loan, you could end up paying a considerable amount of money in interest. For instance, a 12 month loan at an 80% interest rate will actually result in less interest than a 36 month loan at a 36% interest rate – so it can be dangerous to stretch out payments too far. |
What are the types of installment loans?
There are many different types of installment loans, and each one has advantages and disadvantages. Let’s take a look at some of the most common types.
- No Credit Check Loans
- Personal Loans
- Auto Loans
- Mortgages
- Student Loans
No Credit Check Loans
As the name would suggest, no credit check loans do not require that you have good or established credit in order to receive money. While this makes them easier to be approved for than other types of loans, they usually come with very high fees and rates of interest. Additionally, the maximum you can borrow is typically around $500, and the full sum is often due back within a few weeks.
| Pros | Cons |
| No credit required | Small loan amount |
| Fast approval | High fees |
| Unsecured loan | High interest rates |
| Fast access to funds | Requires very fast repayment |
Personal Loans
Personal loans are a type of installment loan offered by many lenders. They allow you to pay a fixed monthly payment over a period of months or years. In order to qualify for a personal loan, you will need to apply and go through a credit check. Personal loans can be used to pay for many different types of expenses – at Sun Loan we offer personal loans to cover things like car repairs, home improvements, family celebrations, and debt consolidation.
| Pros | Cons |
| All money is received upfront | Can require origination fees |
| Interest rate is fixed and locked in at time of loan | Requires that you have established credit |
| Monthly payments are consistent amount, and there is no balloon payment at end of loan term | Can have high interest rates |
| Loan money can be used to fund a variety of purchases | Usually don’t allow you to increase the loan amount at a later date if your needs change |
Auto Loans
Auto loans can be used to purchase a new or used vehicle. They are a type of installment loan. Usually, if a person is purchasing a car, they will pay a down payment to cover part of the cost of the vehicle, and then finance the rest using an auto loan. This provides them with the necessary money upfront to pay the car dealer – then, they pay this money back to the lender slowly over months or years. Once they have fully paid off the loan, the lender will give them the title of the car and it will officially belong to the owner.
| Pros | Cons |
| Allows you to buy a vehicle without having to pay the full cost upfront | Requires good credit to get a favorable interest rate |
| Has fixed monthly payments and interest rate | If you fail to make payments, your car can be repossessed by the lender |
Mortgages
Mortgages are a type of installment loan used to purchase a home. They typically make use of a 15 or 30 year payment schedule.
| Pros | Cons |
| Interest rate and monthly payment are both fixed amounts | If you fail to make payments, you can lose your home |
| You have a long time to pay back the money | Very long-term loan commitment |
| Interest rates tend to be low | May require good to excellent credit to qualify |
Student Loans
Student loans can be used to pay for school-related expenses such as tuition, textbooks, and room and board. They are usually paid back over the course of many years.
| Pros | Cons |
| Federal student loans don’t have minimum credit score requirements | Private student loans may have credit score requirements |
| Interest rate and monthly payments are fixed | Long-term loan commitment |
| Loan may qualify for forgiveness | Because of long loan repayment period, total interest paid can be significant |
What are secured installment loans?
Secured installment loans are a type of loan that require you to put up collateral in order to receive funds. If you fail to pay back the loan as agreed, the lender has the right to take your collateral. For instance, if you have an auto loan, your “collateral” would be the car that you used loan money to purchase – if you have a mortgage, your house would be the collateral. Unsecured loans do not require that you put up collateral. Sun Loan offers both secured and unsecured loans based on the borrower’s credit history and the amount that they would like to borrow.
Where to get an installment loan?
Installment loans come in many shapes and sizes, each with their own advantages. If you are interested in applying for a personal installment loan, the Sun Loan team is here to help. Let’s find the perfect loan for your needs!
