Installment payments are the method of paying off an installment loan. What is an installment loan? Assuming you make all of the payments on time, the installment is designed to pay the interest you’re accruing and gradually pay down your principal balance. Other types of loans could involve single repayment, balloon payments, introductory payments, or interest-only payments.
Some of the most common types of installment loans include:
- Student loans
- Mortgage loans
- Auto loans
- Personal loans
Deciding if making installment payments is right for you all depends on how well you can manage your payments and if your financial situation fits the equation.
Installment Payments vs. Other Repayment Types
Paying in installments offers you the flexibility to stretch your money while being able to purchase the things you need and want. An installment loan can work for you if you can work your monthly installments into your budget and manage them without falling behind on other financial obligations.
- You can pay your large purchases over time.
- With fixed monthly payments, your payment amount and the payment date will not change.
- You can use personal installment loans for many of your financial needs.
- Some installment loans require collateral
- Some installment loans don’t let you pay off the balance early (although this is rare)
Other Repayment Types
Other repayment types may not allow the same flexibility and can be taxing on your monthly income.
These repayment options include the following:
- Single repayment: This is a one-time payment made in full to satisfy a debt. It doesn’t spread out the repayment like an installment.
- Balloon payment: This is a large, lump-sum payment made at the end of a loan’s term. The size of the payment is usually equal to the loan’s remaining principal balance, and its timing is typically dictated by the loan’s amortization schedule, which can be large, unaffordable, and a surprise.
- Introductory payment: This is a payment made at the beginning of a loan term in order to lower the amount of interest that accrues over the life of the loan. This type of repayment is often required to secure a lower interest rate on the loan but can provide a false sense of affordability.
- Interest-only: This is a payment where you only pay the interest on your loan and put nothing toward the principal delaying the actual repayment of the loan. The loan will take longer to pay off, and you’ll end up paying more interest in the long run.
The Bottom Line
An installment loan can be used for any considerable expense you may need or want to pay for but don’t have the funds for right now. Opting to make payments in installments can be beneficial if you use your loan responsibly and make your payments on time. Whether installment payments are right for you depends on your ability to manage your finances responsibly. Installment loans are a more manageable way to pay off a loan so you can enjoy more of the things you love.