When you get an installment loan, you receive a specific amount of money and agree to repay through regular, scheduled payments over a defined period. The name “installment loan” comes from how you pay it back — in regular installments or chunks until there’s no balance. Common examples of installment loans include personal loans, student loans, auto loans, and mortgages.
If you’re considering an installment loan, it’s a good idea to learn about all the available options before making a choice. In the article below, we’ll define installment loans, discuss how they work, and go over their pros and cons.
- How do installment loans work?
- Types of installment loans
- What are the differences between secured and unsecured installment loans?
- Advantages and disadvantages of installment loans
- Is an installment loan a good idea?
- The bottom line
How do installment loans work?
So, what is an installment loan, and how does it work? The installment loan meaning is pretty simple — you borrow money once and pay it back over time. The installment loan definition includes any loan with set, regular payments that don’t change.
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’ll receive a loan offer
- Accept loan offer and pay any origination fee(s)
- Receive funds
- Begin making regular, scheduled payments to pay back loan and interest
Application process
The installment loan process begins when you apply for a loan. The loan application will typically require the following information:
- Name
- Phone number
- Amount of money requested
- Reason for the loan
- Financial documents
Then, the lender will run a credit check to determine your credit history. Some lenders do a soft pull while other do a hard pull. If they feel that you’re a good loan candidate, they’ll make you an 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’ll receive the loan money in a lump sum as soon as the same day.
Repayment terms
After you get the money, you’ll need to make payments to pay it back. These payments might be weekly, every two weeks, or monthly. Weekly and biweekly payments are most common with payday loans, while traditional installment loans have monthly payments.
Many installment loans have a fixed interest rate, which means your payment stays the same each time. With these loans, you know exactly how much you’ll pay and for how long. But, some installment loans have variable interest rates that can change over time. With variable rates, your payments might go up or down depending on changes in the economy.
Installment loans also have a set payment schedule. Your lender will give you a clear list of when each payment is due. You might have to pay extra fees if you’re late on a payment.
Types of installment loans
There are many kinds of installment loans. Each type works differently and is used for different things. Here are some examples of installment loans:
Personal loans
Personal loans are a type of installment loan offered by many lenders. They allow you to pay a fixed monthly payment over months or years. To qualify for a personal loan, you’ll need to apply and go through a credit check. Personal loans can be used to pay for various expenses.
| Pros of personal installment loans | Cons of personal installment loans |
| 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, and there’s no balloon payment at end of loan term | Can have high interest rates |
| Loan money can be used to fund a variety of purchases | Don’t usually 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. Once you pay off the loan, the lender will give you the car title, which will officially belong to you.
| Pros of auto loans | Cons of auto loans |
| 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 have a 15 or 30 year payment schedule.
| Pros of mortgages | Cons of mortgages |
| 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 |
Payday loans
Payday loans are short-term loans, usually due by your next paycheck.
| Pros of payday loans | Cons of payday loans |
| Easy to get, even with bad credit | Very high interest rates |
| You’ll get your money immediately | Short repayment period |
| You don’t need collateral | Much more expensive than other options |
Student loans
You can use student loans to pay for school-related expenses, such as tuition, textbooks, and room and board. You typically pay these back over many years.
| Pros of student loans | Cons of student loans |
| 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 the long loan repayment period, the total interest paid can be significant |
Buy now, pay later loans
These newer loans let you split a purchase into smaller payments over a short time.
| Pros of buy now, pay later loans | Cons of buy now, pay later loans |
| Often interest-free if paid on time | Late fees can be high |
| Quick approval process | Missing payments can hurt your credit score |
| Easy to understand payment schedule | May lead to spending more than planned |
What are the differences between secured and unsecured installment loans?
Installment loans come in two main types: secured and unsecured.
Secured installment loans require you to put up collateral to receive funds. If you fail to repay 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 you used loan money to purchase.
Unsecured loans don’t need collateral. The lender trusts you to pay based on your credit history. Personal loans are usually unsecured. Since there’s no collateral, the interest rates may be higher.
The main differences between these two options are:
- Risk: Secured loans risk losing your property, while unsecured loans don’t.
- Interest rates: Secured loans may come with lower rates.
- Approval: It’s often easier to get approved for secured loans.
- Loan amounts: Secured loans typically offer more money.
Advantages and disadvantages of installment loans
Installment loans can be great options for many, but they’re not for everyone and every situation. Let’s go over the advantages and disadvantages of installment loans.
Benefits of installment loans
Installment loans can be helpful for many reasons, such as:
- Allows you to pay for large expenses: Not everyone can pay for large expenses like cars, homes, or education all at once. Installment loans let you make these important purchases and pay over time.
- Quick access to money: Many installment loans give you the money fast, sometimes within a day or two.
- Steady payment schedule: With fixed payments, you know exactly how much to budget each month. There are no surprises in how much you owe.
- Helps build your credit: When you make your payments on time and keep your credit utilization low, it shows other lenders you’re trustworthy.
Drawbacks of installment loans
There are also some downsides to consider before taking out an installment loan. These include:
- It’s a finite source of money: Unlike credit cards you can use repeatedly, installment loans give you money just once. You’ll have to apply for a new loan or refinance if you need more money later.
- Long loan terms: Some installment loans last for years or even decades. This means you’ll make payments for a long time, which adds to the overall interest paid.
- Potential credit damage: If you fail to make your payments on time, you may be charged late fees and your credit score will drop.
Is an installment loan a good idea?
Before getting an installment loan, think about these important points:
- Your income situation: Make sure you can afford the monthly payments, even if something unexpected happens.
- Interest rates and fees: Look at the total cost of the loan. A longer loan might have smaller payments but cost more overall.
- Your credit score: If you have a good credit score, you’ll often get better rates. It might be worth improving your credit before applying.
- The purpose of the loan: Is this something you really need? Is it worth paying extra in interest to have it now?
- Other options: Have you looked into all the different types of personal loans or alternatives to taking out a loan? Sometimes, saving up, buying used, or finding a less expensive option might be better.
- Your future plans: Will this loan payment make it hard to reach other goals, like saving for retirement or buying a home?
The bottom line
Installment loans allow you to make big purchases or handle expenses when you don’t have all the money upfront. They offer predictable payments and can help build your credit score when used wisely. However, you must also pay interest and commit to payments for months or years.
If you decide an installment loan is right for you, Sun Loan is here to help. We offer personal online loans with clear terms and a simple process.
