What Is an Installment Loan?

An installment loan is one that you pay back in equal monthly installments over a certain period of time. The major components of an installment loan are typically how much you borrow (e.g.  the principal)

The length of the term.

The interest rate at which you borrow the money.

Those details determine how much you will pay each month and how much the loan will cost you in total.

Installment  Loan Example

A person borrows a personal loan of $5,000 for three years. That means they will make 36 monthly payments. Their interest rate is 9%. The person would make monthly installment loan payments of $159.00. The total amount paid back would be $5,723.95, which means the loan would have cost them $723.95

Consider the same exact loan of $5,000 for someone who was offered an interest rate of 12%. The person would pay $166.07 per month. The total paid back would be $5,978.58, which means the extra interest points would cost them a bit over $200 in total.



12% Interest  rate 

9% Interest  rate 

Unlike credit card balances, simply holding an installment account won’t reduce your score much or for long. As a matter of fact, installment loans can help build your credit if you make regular payments. t demonstrates to future lenders that you do make on-time payments as agreed. For many people, this is one reason that they take out an installment loan — to help build their credit.

How Do Installment Loans Affect Your Credit Score?

If you apply in person, the funds might come in the form of a check. If you apply for an installment loan online, the funds are typically transferred into your bank account. However, if you borrowed the money for a very specific purpose, such as to fund your education or buy a car, the lender might provide the funds directly to the car dealership or school.

How Do You Receive Funds From an Installment Loan?

All car loans are installment loans, whether you’re buying new or used. Typically, a car loan’s term typically ranges from five to eight years. However, if you’re borrowing for an inexpensive used car or if you can afford to make a large down payment, you might only need a few years to pay off the total.

Common Types of Installment Loans

Auto Loans

Common Types of Installment Loans: 

Whether you’re getting a government student loan after filing a FAFSA form or going with a private lender, your student loan is an installment account. Government student loan interest rates are set each year and don’t rely on credit histories. Private loans for school do rely on credit history, and the interest you pay could be impacted by your credit score.

Student loans

Common Types of Installment Loans: 

If you owe higher-interest debt, such as a credit card balance, you may be able to get an installment loan to pay off that debt. You can spread your payments for higher-interest debt over time with a fixed monthly payment. The downside is that you either have to close the credit card accounts or have the willpower not to use them, or you could run them up again and have double the debt you started with.

Debt consolidation

You can also take secure installment loans out on a variety of things, including recreational vehicles or expensive jewelry. These work similarly to auto loans in that the item you purchase with the loan is security for the loan. If you don’t make your monthly payments, the creditor can repossess the item and sell it to help cover some of its losses.

Other secure loans

You can use personal loans to cover old debts, medical bills or unexpected expenses. Since they aren’t secured with a specific item, you might pay more in interest because the lender is taking more risk.

Unsecured  personal loans

If you need money to make ends meet in a time of emergency, cover the cost of an upcoming vacation or simply want to rebuild your credit, a personal installment loan may be just what you’re looking for.