What Is An Installment Loan?

What is an installment loan example?

Examples of installment loans include mortgages, automotive loans, business loans, student loans, and personal loans. You may also see other various types of specialty loans such as RV loans, debt consolidation loans, and home repair loans. These are all forms of installment loans.
Each type of installment loan will have its own industry standard set of typical fees, loan terms, and interest rates. For example, mortgages are typically offered as a long-term 30 year or a 15 year loan, while the average auto loan is set up on a 7 year repayment period.
An installment loan is a form of financing that provides consumers with a lump sum of cash that can then be repaid over a set period of time with regular monthly payments or installments.
Typically, the interest rate and monthly payment of an installment loan is determined upfront and remains the same throughout the lifetime of the loan. Installment loan repayment periods can be anywhere from 1 to 30 years depending on the type of loan.

How does an installment loan work?

Installment loans work by lending the borrower a lump sum of money that is then repaid on a set schedule. This schedule is set at the time the loan origination and is called the loan term or loan repayment period. Each monthly payment is for a set equal amount that includes both principal and interest. When all of the monthly payments have been fulfilled, the account is closed. It does not remain open for ongoing access like a line of credit or credit card does.

What is the difference between an installment loan and a personal loan?

A personal loan is structured as an installment loan. While not all installment loans are personal loans, all personal loans are installment loans. Any type of financing that is paid back in equal monthly payments is an installment loan. Other types of loans that are paid back in a lump sum (like a payday loan) are not installment loans.
In addition, there are other types of financing such as credit cards and lines of credit that are revolving and not structured as a loan. Although they may have monthly payments, the amount of the payment varies depending on what has been charged to the credit account.

Is an installment loan good?

Installment loans can be a very good way of funding a major purchase upfront by spreading out the cost of the expense over a longer period of time. Since they typically have lower interest rates than various other forms of financing such as credit cards, installment loans make a wise financial choice. Many consumers cannot responsibly manage revolving types of financing such as credit cards, and installment loans offer a much more efficient way to borrow money.

Why do people get installment loans?

Consumers take out installment loans as a form of financing a large upfront expense by spreading it out into equal monthly payments over time. Most people do not have enough cash on hand to buy a home or a car without some form of financing. Installment loans give people access to these major purchases without needing to save up the funds or borrow them from friends and family. In addition, installment loans offer various benefits over revolving types of credit including lower interest rates and the stability of having a fixed monthly payment.

Is a bank loan an installment loan?

Installment loans can be generated from a few different sources including banks, credit unions, and online lenders. Most loans are set up as installment loans including student loans, business loans, mortgages, automotive loans, and personal loans. The only type of loan that is not set up as an installment loan are payday loans which are paid back in one lump sum payment.
In addition to installment loans, the other type of financing is revolving which includes credit cards and lines of credit such as home equity lines of credit. Revolving credit allows consumers to continue to make purchases and reborrow funds as long as their account remains open and active. Some lines of credit limit consumers to taking out funds during a predetermined draw period. In this case, the remaining balance may be converted into installment payments at the end of this period when the line of credit is closed.

Do installment loans hurt your credit?

Installment loans can hurt your credit score if you miss a payment, have any late payments, or default on the repayment of the loan. All payment activity on any type of installment loan is reported to the 3 major credit bureaus, so make sure that you keep up with your monthly payments so that all of the information reported is positive. Negative information about installment loans will remain on your credit report for 7 years before eventually falling off.

Can you pay off an installment loan early?

You can pay off an installment loan or any type of loan early, as long as you have the funds to do so and the terms allow you to. Paying off any debt early is always a smart move that can save you money on interest and improve your overall financial situation. Just keep in mind that the lender may impose a prepayment penalty or early payoff fee for doing so, and it may also affect your credit score.
In addition, you can typically make extra monthly payments on top of the minimum monthly payment in order to help get out of debt faster and avoid paying unnecessary interest.
Always check with your bank or other lender to find out the exact terms and conditions on your installment loan.

What happens if you pay off an installment loan early?

Paying off an installment loan early is a wise financial move if you can swing it and there are no fees. When you pay off an installment loan early, you can save a significant amount of money that you would have paid out in interest over time. In addition, removing one of your monthly debt payments will improve your debt-to-income ratio, which can be a major factor in applying for new types of financing. For example, if you are in the process of applying for a mortgage, it can be extremely beneficial to pay off your automotive loan or personal loan in order to improve your DTI.
The only possible downside to paying off your debt is if the lender of your installment loan has imposed any sort of prepayment penalty. Some types of installment loans, such as mortgages, may charge borrowers for paying down the balance sooner than planned.
In addition, you may receive a slight hit to your credit score for closing off an account early. Unlike paying off a credit card early which reduces your credit utilization and improves your credit score, paying off your installment loan early closes your account, potentially resulting in less account diversity and a shorter credit history. Both of these changes, along with having fewer open accounts that are reporting to the credit bureaus, can cause a slight temporary dip to your credit.
However, even if this is the case, you should not let these potential drawbacks deter you from paying off your installment loan if you have the funds to do so. Getting out of debt sooner is always a good thing. It can also help improve your credit score in the long run because you are avoiding the possibility of racking up late or missed payments on your loan over time.

Is an installment loan better than a payday loan?

In general, installment loans are one of the best financing options available to consumers today. Taking out an installment loan is most definitely a better choice for most financial situations than a payday loan in most cases. There are several precautions to the use of payday loans.
Payday loans should be considered only as a last resort or as a source of a short-term funding when the borrower is absolutely certain they can repay the loan. Although information from payday loans is not typically reported to the credit bureaus, a complete failure to repay your payday loan will likely result in collections activity which will then appear on your credit report.
In addition, it can be very easy to get stuck in a cycle of continuous borrowing with payday loans. A study has shown that as many as 4 out of 5 payday loans are rolled over or reborrowed within 30 days of the original loan, making it very hard for consumers to get ahead.

What do you need to get an installment loan?

To get an installment loan, you typically need to get prequalified and then approved with a bank, credit union, or online lender who offers the type of financing that you need. Alternatively, you can go through a broker such as in the case of obtaining a mortgage.
To apply for a loan, your lender may require you to submit documentation as proof of your identity, income, employment and other personal and financial information. Generally, you will also need to have an established credit history and a good credit score in order to receive financing. Although there are some installment loans available to those with no credit or poor credit, it can be much more difficult to get a loan without a solid credit score and history.
Typically, loan applicants must be 18 years of age with a valid social security number, bank account, photo ID, and credit history. Borrowers that do not meet these qualifications can apply using a cosigner who does, since their information will supersede that of the original applicant.

How can I get out of an installment loan?

The only way that you can get out of an installment loan is to either pay it off or refinance it as a new loan with better, more beneficial terms. Refinancing your installment loan can help you pay it off sooner if you convert it to a shorter repayment period. For example, you can refinance your traditional 30 year mortgage into a 15 year mortgage.
If you have several smaller installment loans (for example an automotive loan, student loan, and business loan) you may want to consider pursuing a personal loan to use as a debt consolidation loan. Although debt consolidation loans are typically used for credit card payoffs, personal loans are available in amounts up to $100,000, which can help turn those various debts into more manageable monthly payments.
Failing to repay your installment loan will result in severe negative consequences to your credit and overall financial situation. If you default on a secured installment loan such as a mortgage or automotive loan, you could lose your home or vehicle. Foreclosures, repossessions, collection activities, bankruptcies, and other negative marks on your credit report can affect your family's finances for years or even decades to come.

How long do installment loans stay on the credit report?

In general, most information including the payment history of your installment loans will stay on your credit report for a maximum of 7 years. This includes everything from foreclosures and short sales to collection accounts, late payments, chapter 13 bankruptcies and judgements.
The exception to this rule is student loans which remain on your credit report indefinitely or 7 years from the last date paid and chapter 7 bankruptcies which remain for 10 years.

Is an installment loan secured or unsecured?

An installment loan can be either secured or unsecured, depending on the type of loan.
Most major types of financing such as automotive loans and mortgages are secured, meaning that in the event that the borrower fails to repay the loan, the bank or other financial institution can seize the asset. Therefore, secured loans always pose a risk to the borrower.
Personal loans are generally unsecured, although secured personal loans are available that use collateral such as a savings account or automotive title to back up the loan.

Do installment loans require a credit check?

Installment loans usually require a credit check to help the lender evaluate your financial situation and determine your overall creditworthiness. Credit checks are done because banks and other financial institutions want to make sure that borrowers have the ability to repay the funds before approving them for a loan. These credit checks can be done as either a soft inquiry or a hard inquiry into your credit report.
If you are hoping to avoid hard inquiries while you are in the loan application process, consider getting prequalified first from a few different lenders until you have a better idea of where you want to pursue your final loan application.

Is a personal loan an installment loan or revolving credit?

A personal loan is a type of installment loan, meaning that you will repay the loan in equal monthly installments over the lifetime of the loan. This is in contrast to credit cards and lines of credit (such as a HELOC) which are set up as a type of revolving credit.
Both of these financing options have their own pros and cons. In most cases, installment loans offer borrowers the stability of a set monthly payment and interest rate that does not change. The exception is that some types of installment loans are set up with variable interest rates that can affect the monthly payment during the lifetime of the loan. By allowing borrows to finance their purchases and expenses with a single lump sum, installment loans are often a smart move.
On the other hand, a revolving line of credit is beneficial when you want or need access to ongoing funds to finance a project or take advantage of credit card rewards programs.