Although the term “installment loan” might not sound familiar, you likely know of — or have used — many common types of installment loans.
What is an installment loan exactly? This type of loan allows you to borrow a fixed amount when you take out a loan. You must determine how much money you require before you borrow the funds, unlike other forms of revolving credits like credit cards or lines of credit.
An installment loan is a combination of personal and commercial loans that are extended to borrowers with regular payments. Each regular payment for the loan includes a part of the principal amount as well as a part of the interest.
Once you have borrowed the funds, the installment loan must be repaid over a set period. This is determined by you and your lender when you take out the loan. The payment schedule is usually monthly but can be adjusted to suit your needs. The loan term is the time that a borrower must repay the loan. A 72-month loan would allow for repayments over six years.
Every payment is called an installment. This is why an installment loan is also known.
Examples Of Common Installment Loans
Installment loans are the most popular type of loan people take out. Installment loans can be used for auto loans, student loans, mortgages, and personal loans.
Auto Loans
Lenders may offer loans with terms between 12 and 96 months. However, auto loans can be repaid in monthly installments. Longer terms are often associated with lower monthly payments and higher interest rates. Even though your monthly payments may be lower than a 36-month loan, you will end up paying more to purchase a car with an overall 84-month term loan.
Mortgages
A mortgage is an installment loan that can be used to finance the purchase of a home. Mortgages are usually repaid over 15-30 years with monthly payments.
Many mortgages include fixed interest rates, which are usually not subject to change. This means that the monthly principal and interest payments will not change.
Personal Loans
Personal loans are a type of installment loan you can use for consolidating debt, paying off unexpected expenses like medical bills, and many other purposes. Personal loans usually have terms of between 12 and 96 months. Personal loans are not typically required collateral like your house or car.
Benefits From Installment Loans
- Most installment loans come with predictable monthly payments. Fixed-interest loans will have predictable monthly payments. This is except for any changes in loan add-ons like insurance.
- Predictable payment amounts and schedules can make it easier for you to budget your monthly loan payments. This will help you avoid missing any payments due to unexpected changes in the amount of your loan.
- Consider your budget when shopping for an installment loan. Make sure that the monthly payments don’t exceed your budget. If they do, it could be difficult to make your full monthly payment in the event of a financial crisis.
- You can also get peace of mind knowing that your debt will be paid by a specific date. Once you have paid the required amount of installments, you should pay off your entire debt. You can pay off your debt quicker if you have a shorter payment term than you can afford.
