What Is an Installment Loan?
An installment loan is a loan with a set number of scheduled payments, usually monthly, over a certain period.
Examples of installment loans include mortgages and auto loans. The fixed payments or “installments” repay the principal and interest over a set period.
This is different than a line of credit, where your available credit increases as you make payments toward the outstanding balance.
Examples of installment loans online include the following:
Auto loans
Auto loans are typically repaid with monthly installments over a period of 12 to 96 months. Longer terms will mean higher interest rates. For example, an auto loan with an 84-month term will incur more interest than one with a 60-month term.
Mortgages
Mortgages are installment loans where you borrow money to buy a house. Mortgages are typically repaid over a period of 15 to 30 years. Some mortgages have fixed interest rates which means monthly payments that don’t change.
Personal loans
Personal loans are general loans that can be used for almost any goal or purpose. Some of the most common reasons people take personal loans is for home improvements, to pay off high interest rate debt, to cover medical expenses or to respond to an emergency. The bank or lender is repaid in fixed monthly installments until the loan is paid in full, including interest.
How Do Installment Loans Work?
Installment loans allow you to borrow a specific amount of money and repay it over a set number of monthly payments until the loan is repaid in full.
The repayment terms, interest rate and fees will be determined by the lender at the time of your application.
The term of a personal installment loan is typically between 12 and 36 months.
Installment loan repayments are typically for the same amount every month. Once you’ve made all your loan payments, the loan is paid off and the lender closes the account.
Installment Loans FAQ
How to get out of high interest installment loans?
Getting out of an installment loan that has high interest rates may seem difficult. This is especially true with payday loans that have average interest rates of 396% in the U.S. as reported by Credit Summit. These loans trap many borrowers into a debt cycle they have difficulty escaping.
If you have multiple loans, consider a debt consolidation program combine all your loans into one single payment plan with lower interest rates. Another option is to prioritize your higher interest loans and pay off the ones with the highest interest rates first.
If these are not suitable options for you, ask for an extended payment plan from your lender. You may end up paying more in the end, but your monthly payments could be lower. If your lender is a member of the Community Financial Services Association of America (CFSAA) they will very likely offer extensions.
How many installment loans can you have?
You may have more than one loan at the same time. You may have multiple loans from the same lender. It is also possible to have loans from multiple lenders. It is important to make sure you can comfortably afford the installments.
What happens if you pay off an installment loan early?
Some lenders offer free early loan payback options. This means you can pay back your installment loan earlier, without any penalties. You’ll also save on interest, because the longer you take to pay, the more interest you pay as well.
Where can I get an installment loan?
There are hundreds of lenders in the U.S. and a good option is to compare loan offers online. You can compare personalized loan offers, rates, and repayment terms to find the best loan for your needs.
Sources
- Consumer Financial Protection Bureau (CFPB)accessed on July 20, 2022
- Financial Services Association of America (CFSAA)accessed on July 20, 2022
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