What Is an Installment Loan?

Are you considering taking out a loan to cover some expenses or making a significant purchase? You've probably come across the term "installment loan." But what exactly is an installment loan, and how does it work?

Key Takeaways

• Installment loans involve repaying a lump sum of money over time through fixed, regular payments that include both principal and interest.
• Unlike credit cards, installment loans offer a predefined repayment plan, simplifying budgeting for borrowers.
• The process begins with an application, followed by a lender assessment, specifying the loan amount, interest rate, and term upon approval.
• Installment loans can be secured (with collateral) or unsecured (based on creditworthiness).
• Installment loan types include no-credit-check loans, mortgages, auto loans, student loans, and buy now, pay later options, catering to various borrowing needs.

What Is an Installment Loan?

An installment loan is where you receive a lump sum of money upfront and repay it over time in fixed, regular payments. These payments, or installments, typically include both the principal amount borrowed and the interest charged by the lender.

One of the defining features of installment loans is their organized repayment schedule. Unlike credit cards or lines of credit, where you have more flexibility in making payments, installment loans have a predetermined repayment plan. This makes it easier for borrowers to budget and plan their finances since they know exactly how much they need to pay each month until the loan is fully repaid.

How Do Installment Loans Work?

Here's a step-by-step breakdown of how installment loans work:

• Application. You start by applying for the loan with a lender, either online or in person, providing personal and financial details for a credit assessment.
• Approval. The lender reviews your application and evaluates your credit history, income, and other factors to decide if you qualify for the loan. They may perform either a "hard" or "soft" credit inquiry, which affects your credit score differently.
• Loan Details. If approved, the lender specifies the loan amount, interest rate, and term (the repayment duration).
• Funding. Once you agree to the terms, the lender either deposits the funds into your bank account or hands you a check, depending on their policies.
• Repayment. This is when you start making regular payments, often monthly, until you've repaid the loan. Each payment chips away at both the principal and interest.
• Completion. After meeting all payment obligations, you've successfully repaid the loan, and the lender considers your debt settled.

The Pros and Cons of Installment Loans

Before deciding whether you should get an installment loan, you must consider the advantages and disadvantages.

Pros of Installment Loans

Installment loans come with the following benefits:

• Easy budgeting. Your monthly repayment amount stays the same throughout your term. Therefore, you know exactly how much you need to cover it, making budgeting a breeze.
• Can quickly cover a large expense. Only a select few have enough liquidity to buy huge purchases outright. Installment loans, particularly mortgages and auto loans, give you the chance to buy life's most expensive investments without excessive down payments.
• Potential for credit score improvement. Repaying an installment loan in full without any late payments will improve your credit score.
• Predictable end date. You can dictate how quickly or slowly you repay your installment loan when you select the term. And since the credit is revolving, you won't overspend. Thus, every payment takes you closer to the final repayment.

Cons of Installment Loans

Here are the drawbacks to consider:

• Potentially long financial commitment. Some installment loans don't come with a long repayment period, but others certainly do. By agreeing to a lengthy term, you're committing to meeting regular payments for the next few years (or decades). Always practice due diligence and read through the terms and conditions carefully. You may be penalized for repaying the loan early.
• Not open-ended. If you need more money in the future, you will not be able to add to your loan amount.
• Inflexible. Unlike repaying a credit card, you won't be able to drop to a minimum payment option — installment loans simply don't have this option. As such, you may find yourself in a sticky situation if your income drops suddenly.
• Credit scores often matter. You may not be able to qualify for all installment loans with a bad credit score. And even if you do gain approval, you won't be given the same terms as somebody with a near-perfect score.

Secured vs. Unsecured Installment Loans

Another key distinction among installment loans is whether they are secured or unsecured. Let's explore what these terms mean and understand when you may practically use either.

Secured installment loans are backed by collateral, which is an asset you pledge to the lender to secure the loan. Common examples of collateral include real estate (for mortgages) and vehicles (for auto loans). If you fail to repay the loan as agreed, the lender can take possession of the collateral to recover their losses.

The presence of collateral in secured loans often results in lower interest rates compared to unsecured loans. Lenders view them as less risky since they have a way to recoup their funds.

Unsecured installment loans, on the other hand, do not require collateral. Lenders approve these loans based primarily on your creditworthiness and income. Because there's no collateral involved, unsecured loans typically come with higher interest rates to offset the lender's risk.

Installment loans like the one offered by Simple Fast Loans are a common example of unsecured installment loans. Since there's no specific asset at stake, your credit history will be used to gauge your ability to repay.

6 Installment Loan Types

All installment loans operate similarly at their core. However, each type has its own functions and eligibility requirements. We'll take a look at six of the most popular installment loan forms here:

1. Personal Installment Loans

Personal installment loans are undoubtedly the most common type of installment loan around. In fact, they're so popular that 23.5 million Americans have one, as TransUnion data shows. But the question is — why are they so popular?

While there are many reasons for the boom in personal installment loans, one of the most long-standing is their versatility. Unlike mortgages, student loans, or auto loans, you can use a personal installment loan to fund any legitimate expense.

Not to mention that they tend to be unsecured, allowing you to borrow cash without risking your assets.

You can get a personal installment loan from credit unions, online lenders, banks, and private lenders with terms typically stretching from 24 to 60 months. And while the amount you receive depends on multiple variables, the caps tend to run between $100 and $10,000.

The two most common uses for these loans are:

• Emergencies. Thanks to their fast approval process, they're convenient when you're faced with an unexpected car repair, medical bill, or veterinary fee.
• Big-ticket purchases. Financial experts never recommend taking out personal loans to fund frivolous purchases. However, people across the country still utilize them for vacations, home improvements, and weddings.

Personal Loans vs. Credit Cards

Personal loans and credit cards offer many of the same features and allow you to borrow funds for any expense. On top of that, they both let you receive funds from a lender, make monthly payments, and improve your credit score when you use them correctly.

However, they have important differences that shouldn't be overlooked. Here's a brief rundown:

Personal Loans	Credit Cards
Offers an upfront lump sum	Provides ongoing access to a predetermined amount
Fixed monthly repayments throughout the loan's lifetime	Variable minimum payments every month
Typically used for larger purchases	Used for everyday expenses and shopping
Come with origination and other types of fees	May have monthly or annual fees
	Some come with 0% introductory periods

 2. Auto Loans

As the name suggests, auto loans are designed to fund vehicle payments. Despite many dealerships providing in-house financing plans, you can also acquire direct auto loans through banks, credit unions, and online lenders. Opting for the latter may reward you with more favorable terms and higher repayment flexibility, although this isn't guaranteed.

To get this loan, you'll typically put a deposit on the car or add your existing vehicle's trade-in value. Then, you'll finance the rest of the purchase price with the auto loan and repay in monthly installments until you've paid in full. 

If you're purchasing a new vehicle from a dealership or online lender, the process tends to be quick and easy. However, it might take longer if you're buying a used car from a private seller and pay for it through your bank or a credit union loan. Either way, it's still a secured loan backed by your vehicle.

3. Mortgages

Mortgages are used to purchase a house. Like auto loans, they are secured by the asset they help you to buy (i.e., the property itself).

While there are many types of mortgages, the most popular requires you to repay the money you've borrowed over 15 to 40 years. Offered by a plethora of financial institutions (e.g., national banks, online lenders, and credit unions), you slowly chip away at the borrowed amount with the option to overpay if you receive a financial windfall.

The loan limits are incredibly high, sometimes running as lofty as $1,000,000 to finance properties in expensive neighborhoods. As for the process, it can take anywhere from 30 to 60 days and beyond since lenders must ensure you can repay the loan based on your income, credit history, down payment, job stability, type of home, and total debt.

4. Student Loans

Both types of student loans (federal and private) are unsecured installment loans that are solely for college tuition and other expenses directly related to studying.

Generally, soon-to-be pupils choose federal student loans, which are offered by the Education Department through a streamlined application called FAFSA (Free Application for Federal Student Aid). They're available to any eligible student who requires the funding. Unlike other loans, you don't need to hit any credit score criteria, and you don't have to undergo a credit check. They've held the preferred student loan position for years, thanks to their unique benefits (i.e., loan forgiveness programs, etc.)

In contrast, private student loans base approvals on your creditworthiness, making it difficult for students to qualify. Said loans are disbursed by a range of financial institutions and online lenders, with each company harboring distinct eligibility requirements. Shopping around is essential if you go this route.

5. Buy Now, Pay Later Loans

Buy now, pay later (otherwise known as BNPL) loans split the cost of purchase into installments to make it more manageable. This financial vehicle, sparked by the unprecedented COVID-19 pandemic in 2020, has taken the online shopping world by storm. So much so that a Nova One Advisor report states the BNPL market is expected to reach $25.3 billion by 2033.

Offered by most online retailers, these by now, pay later schemes are a convenient way of affording things without amounting credit card debt. Not to mention they can be easier to acquire than traditional personal loans and have much shorter terms (i.e., a few weeks).

Like other types of installment loans, BNPL loans come in various shapes and sizes. Some providers necessitate a hard credit check; others don't. Some lenders report your repayments to the credit bureaus; others don't. 

6. Payday Loans

Payday loans are short-term, small-dollar loans that are designed to be repaid when you receive your next paycheck. The aptly named financial vehicle is intended to assist you during a crisis or when you can't qualify for a different type of credit. 

Both the terms and structure of the loan vary by from state to state and lender to lender. However, they're often capped at $500 and don't require a credit check to qualify. Oftentimes, your repayment habits won't be reported to the credit bureaus, so you don't have to worry about impacting your credit score by taking out a payday loan.

Alternatives to Installment Loans

Installment loans are handy tools if you're looking to finance a renovation, get quick access to cash, or cover a large expense. After all, they give you a lump-sum deposit that can be repaid for the next few months, years, or decades.

But despite their ability to handle nearly all legal expenses, they aren't the right option for everyone. So, if you've concluded that you need a different type of credit, consider these:

Lines of Credit

Personal lines of credit (otherwise known as PLOCs) are a direct, unsecured alternative to installment loans, providing increased flexibility due to their credit-card-esque operation. 

Made with long-term expenses or larger projects in mind, PLOCs let you borrow exactly what you need, whenever you need it. Of course, the amount is capped, and you can only withdraw cash during the aptly named "draw period," but it's one of the more versatile installment loan alternatives on the market.

Once your draw period closes, your line of credit transforms into a term loan. At this point, you must make the monthly payments.

Credit Card

If you don't have a solid financial plan/budget, credit cards can be tricky to manage. But with positive repayments and responsible usage, they can provide unique benefits — air miles and cashback tend to be the most popular.

As long as your balance is low toward the end of the month, you won't have to worry about paying excessive costs. Plan to meet each repayment on time and in full, but if you fall short a couple of times, at least make the minimum payment to avoid interest accrual.

Additionally, you must consider the fees. Most credit cards come with several charges, one of them being an annual fee that can range from $99 to $600. The most desirable rewards often come with higher annual fees and are available solely to borrowers with excellent credit.

Home Equity Line of Credit (HELOC)

If you have equity in your home and need to cover multiple major expenses, a home equity line of credit (a.k.a., a HELOC) is a good installment loan alternative. Property owners tend to use this revolving credit for academic-related expenses or extensive home renovation projects. 

Your equity dictates the amount you can withdraw. However, lenders often let you withdraw up to 85%. Like lines of credit, HELOCs offer a draw period, typically lasting for ten years, during which you can take out money as and when you need it. 

The main drawback? Your house becomes the collateral.

Installment loans come in various forms, including personal loans, auto loans, mortgages, student loans, and buy now, pay later plans. Despite their differences, they all operate on the same basic principle: you receive a lump sum upfront and repay it in fixed monthly installments over a set period. This predictable repayment structure makes them a popular choice for financing big purchases or consolidating debt.

However, it’s crucial to weigh the pros and cons before committing to a loan contract. Understanding the details of how installment loans work can help you make informed financial decisions and choose the best option for your needs. Dive into our detailed guide to explore the ins and outs of installment loans and ensure you’re fully prepared before taking the plunge!

Should You Get an Installment Loan?

Deciding whether to pursue an installment loan is a substantial financial choice that requires thoughtful deliberation. Before committing, it's imperative to assess your unique financial circumstances and specific needs. Firstly, pinpoint the primary purpose of the loan—determine if it addresses an essential expense or a discretionary purchase.

Generally, it's advisable to reserve installment loans for critical needs such as home purchases or educational funding. Next, delve into your monthly budget to ensure that you can comfortably incorporate the added financial responsibility of loan payments without jeopardizing other vital financial obligations.

A comprehensive budget analysis will help you ascertain whether taking out the loan aligns with your current financial situation. Lastly, don't rush into a loan agreement; take the time to shop around and compare interest rates and terms offered by various lenders. This meticulous approach can lead you to the most advantageous loan offer, potentially saving you money over the loan's duration.

Where To Get an Installment Loan

If you've decided that an installment loan is the right choice for your financial needs, the next step is finding a reputable lender. You have several options for obtaining an installment loan:

1. Traditional Banks. Many well-established banks offer installment loans with competitive interest rates. If you have a good relationship with your bank, this can be a convenient option.
2. Credit Unions. Credit unions are member-focused financial institutions that often provide favorable loan terms to their members. If you're a member of a credit union, check out their installment loan offerings.
3. Online Lenders. In the digital age, online lenders have become increasingly popular. In the case of SimpleFastLoans, a borrower can apply from their phone and receive same-day approval and funding. It’s all about convenience.
4. Credit Card Cash Advances. While not a traditional installment loan, credit card cash advances allow you to borrow against your credit card limit and repay the amount over time with interest. Keep in mind that the interest rates on cash advances are typically higher than other options.

What To Consider When Choosing Installment Loans

Choosing the right installment loan can be overwhelming. Here’s a simple guide to help you navigate the process:

1. Check Your Credit
   Knowing your credit score is key. Lenders may not focus heavily on it, but better credit often means higher loan amounts and lower interest rates. You can check your credit score for free through services like Credit Karma or directly from the three major credit agencies once a year.

2. Shop Around
   Compare loans by looking at key factors: required credit score, income level, loan amount, interest rate, and payment terms. Doing your research can help you find the best deal.

3. Spot Scams
   Be cautious of companies asking for money or personal details before offering a loan. Legitimate lenders will never charge upfront fees, so avoid any company that does.

Following these tips will help you find a safe and suitable installment loan.

Top 5 Reasons People Take Out Installment Loans

Installment loans are a popular option for covering expenses, especially for those with less-than-perfect credit. Here's why people commonly use them:

1. Medical Bills
   Medical emergencies can result in high costs, and installment loans offer a quick way to cover these expenses when insurance falls short.

2. Home Repairs
   Urgent home repairs like fixing a broken heater or termite damage often require immediate attention, and installment loans provide a practical solution.

3. Car Expenses
   Car repairs are costly and often come unexpectedly. Installment loans help cover these expenses without dipping into savings.

4. Debt Consolidation
   Borrowers use installment loans to consolidate high-interest debt into one manageable payment, often with better terms.

5. Education Costs
   From tuition to additional fees, education is expensive. Installment loans are a common way to finance these costs without depleting savings.

These loans provide fast access to funds, making them a go-to for unexpected expenses.

Can You Get an Installment Loan with Bad Credit?

Having bad credit can make borrowing more challenging, but it doesn't necessarily mean you can't get an installment loan. Many lenders like SimpleFastLoans specialize in providing loans to individuals with bad credit or no credit history. However, it's important to be aware of a few things:

• Emergencies only. Installment loans like the variety from Simple Fast Loans are for emergencies like urgent medical bills or a necessary car repair. Your credit score is a bill of health for your financial life, let’s keep it humming.
• Alternative Credit Assessment. Many lenders use alternative methods to assess creditworthiness, such as income and employment history.

Before applying for an installment loan with bad credit, shop around and compare options to find the most favorable terms. No matter your credit or situation, online loans like those from Simple Fast Loans are flexible and can be useful during an emergency. Of course, be cautious of predatory lenders who may take advantage of your situation, and make sure to read the terms and conditions carefully.

How To Apply for an Installment Loan

When borrowing money, research is key. Check your credit, gather documents, follow the application process, and maintain open communication with your lender.

Ready to take control of your finances? Apply for your installment loan today, compare offers, and choose the best fit for your budget and goals

Related Frequently Asked Questions (FAQs)

When readers look for topics around installment loans, we’ve found they often research these questions as well.

What Is the Difference Between a Hard and Soft Credit Check?

Lenders often perform credit checks when evaluating loan applications, but there are two primary types: hard and soft inquiries.

Hard Inquiry

This type of credit check occurs when you apply for credit, such as a loan or credit card. It may slightly impact your credit score and appear on your credit report, visible to other potential lenders.

Soft Inquiry

Soft credit checks typically occur during background checks or when you check your own credit. They do not affect your credit score and are not visible to other lenders.

When applying for an installment loan, it's important to understand which type of credit check the lender will perform. Multiple hard inquiries in a short period can negatively impact your credit score, so it's wise to minimize these when possible.