An installment loan offers a lump sum of money upfront. If you take one out, you’ll repay what you borrow plus interest over a fixed number of regular payments or installments. The loan agreement terms will determine your payment amount, payment frequency, and set interest rate.
An installment loan can be a great option if you need cash to cover a large or small expense, like a car repair, medical bill, or home improvement project. It can help you meet just about any financial goal with ease. Let’s take a closer look at what installment loans are and how they work.
Secured vs. unsecured installment loans
Installment loans can be secured or unsecured. While secured loans involve collateral or an asset you own, like a house or a car, unsecured loans do not. Since secured installment loans pose less of a risk to lenders, they tend to come with lower interest rates. However, interest rates for both types of loans are based on factors like credit score, income, and outstanding debt.
Types of installment loans
Some examples of installment loans include:
Personal loans are installment loans you can use for just about any purpose. The amounts range from $1,000 to $100,000, and repayment terms are usually between two to seven years. Even though secured personal loans exist, unsecured personal loans are more common.
A mortgage is an installment loan you use to buy a house. If you pursue a mortgage, you’ll borrow your house value and pay it back with interest in monthly installments, usually over 15 to 30 years. There are many different types of mortgages, like conventional loans, FHA loans, VA loans, and USDA loans. If you default on your mortgage, the lender can put your home into foreclosure.
Car loans are secured installment loans. You borrow the cost of your vehicle and repay it with interest over a period of two to five years. Since car loans are secured to your vehicle, the lender may repossess it if you miss your payments.
Student loans are installment loans used for post-secondary education costs like tuition, books, supplies, and living expenses. They can be federal or private and come with fixed or variable rates. In most cases, you begin to pay them back after you graduate.
Buy now, pay later
If you go to an online or in-person store, you may have the option to “buy now, pay later.” This means you can break your purchase up into equal payments instead of paying for all of it at once.
The Bottom line
An installment loan is a valuable financial tool. As long as you make your payments on time and pay it back in full, your life can be easier. With an installment loan, you’ll be able to make various purchases even if you don’t have a lot of cash at your disposal.