What Is an Installment Loan?
An installment loan is one in which a person borrows a lump sum amount of money for a specific amount of time that is divided into a number of equal payments, also known as installments. Lenders usually charge interest on installment loans. The interest is built into the payments so that the loan and the interest are paid off at the same time. This is known as an amortized loan.
What Kinds of Loans Are Installment Loans Used For?
There are several types of installment loans. Some of the most common are auto loans and mortgages. In both cases, a person borrows a specific amount of money, like the purchase price of a car. Then, the loan is set for a specific amount of time, typically 60 or 72 months for most new vehicle loans, or 15 or 30 years for most mortgages. These loans charge an interest rate that is calculated into the payment of the loan so the same number of payments pays off both the loan and the interest on the loan.
Another common type of installment loan is a student loan. Although these loans are sometimes structured differently while the borrower is an active student, upon completion of the educational program, the student loan becomes an installment loan with a set number of payments over a specified amount of time.
Installments loans are often used to purchase more expensive items that may cost more than the borrower can afford to pay in one payment, such as a hot tub, an appliance, or a boat. Personal loans are another common type of installment loan. But unlike other installment loans, for a personal loan the lender does not require the funds to be used to purchase a specific item. Instead, the borrower receives cash to do use however they like. As with installment loans, personal loans have a set repayment schedule.
A newer type of loan is the buy-now-pay-later (BNPL) loan. These loans are usually short-term loans. The most common type of BNPL loan requires a payment equal to one-fourth of the total loan amount every two weeks. These loans are often interest free.
What Kinds of Loans Are Not Installment Loans?
Now that we’ve established what an installment loan is, let’s discuss the types of loans that aren’t considered installment loans. Credit cards are not installment loans. Lines of credit, including personal lines of credit and home equity lines of credit, are not installment loans. With these types of loans, the borrower may borrow some or all of a preset amount of money. Although the payments are usually similar to those of installment loans, a borrower with a line of credit may borrow more money than they started with, causing the payment amount to change. A person may even re-borrow money that had previously been repaid. In each case, the loan amount is not fixed, and therefore, the payments are not fixed.
How Do Installment Loans Affect My Credit Score?
A credit score is a complicated mathematical formula that takes many factors into account. Simplified, your credit score will be higher if you have less overall debt compared to the maximum debt you are allowed to have, or your overall credit limit. A new installment loan will make this ratio higher, reducing your credit score initially. However, every on-time payment you make will reduce your debt amount and slowly increase your credit score. Your credit score is heavily weighted by how many payments you make on time. With each additional on-time payment to an installment loan, this highest-weighted part of your credit score will increase.
Finally, a credit score is impacted by the number and type of accounts a person has. Adding an installment loan to a credit report that only has credit card accounts, for example, will increase this part of the credit score formula. On the other hand, a person with several installment loan accounts and no other type of loan account may find this part of their score decreased. As is typically the case, making on-time payments without any late payments has the biggest effect on increasing your credit score.
Where Do I Get an Installment Loan?
Almost all installment loans come from banks. Sometimes the lender takes the installment loan directly from the bank, like with a mortgage. Often, however, the business that the consumer is buying from acts as an intermediary. If you’ve ever purchased an item using a payment plan, chances are, if you read the application closely, you will find the money comes from a bank even though you got the loan at an appliance store or a car dealership.
There are several ways to get an installment loan without a bank. Some local businesses such as payday lenders and pawnshops will lend money to customers with a fixed installment repayment plan. Online lenders are becoming more common as well. These lenders often act as an intermediary between the borrower and an unseen bank, but may also lend money from their own resources as well.
Installment Loan Features
- An installment loan is a single loan for a specific, lump sum of money.
- An installment loan is for a fixed amount of time.
- Repayments on an installment loan are made as fixed payments, known as installments, that will result in the loan amount being paid off by the agreed-upon length.
- Installment periods may be of any length, such as annually or semi-annually. However, most installment loans have monthly payments.
- If interest is charged on an installment loan, the interest is computed and added to the installment payments so that the loan amount and all interest will be paid off at the end of the loan. This process is known as amortization.
- If a loan charges interest, the borrower will repay more than the original loan amount.
The amount of interest paid is a function of the interest rate and the length of the loan. A higher interest rate will result in a larger amount needed to repay the loan. A longer term will also result in a larger amount needed to repay the loan. A longer term on an installment loan may lower the amount of each installment payment but will increase the amount repaid overall on the same loan amount because there will be more payments.
Find More Information on Installment Loans
If you’d like to learn more about installment loans or would like to apply for an installment loan online, contact EZ Money! We also offer instant funding, so you can get the cash you need fast!