What Are Installment Loans?

What exactly is an installment loan?

If you are looking into applying for a loan, you may come across the term ‘installment loan’. There are so many different types of loans available, that it can be overwhelming to a newbie in borrowing.

Installment loans are a common type of loan which is often used to buy things such as cars, houses, and other large purchases. You can even have an installment loan that goes by a different name, an example of this would be mortgages.

Let’s take some time and learn about installment loans, and if you want to learn even more about them, check out installment loans by CreditNinja.

How do installment loans work?

So, how do these loan types work?

Well, they are a lump sum of money that you borrow and repay in payments, otherwise named as installments, over a period of time decided between you and the borrower. This time period can be months or even years.

They can be secured with collateral, such as a car or a house, or they can be unsecured, although unsecured loans will traditionally have a higher interest rate, regardless of credit worthiness.

Installment loans work differently than revolving credit does. Revolving credit is the type of credit you get with a credit card or home equity line of credit. This is because you borrow the fund all at once, and so you have to then start repaying it. This means you cannot get more money without applying for a new loan.

Installment loans will also give you more time to repay the whole loan, unlike other loans such as payday loans, which will require a full repayment of the money that you borrowed by your next payday.

What are some examples of installment loans?

One of the most popular types of installment loan is a personal loan. They are loans that can be used for almost anything and can range from $1,000 to $100,000. Repayment for these loans can be anywhere from two to seven years. Of course, the lender will also decide if you qualify for this loan, and if you do, what rate you will get. This all depends on things such as your credit history, your credit score, your income, employment status, and if you have any outstanding debts.

Unsecured personal loans are the most common type of personal loans, but some lenders will let you use a savings or investment account or even a vehicle as collateral for the loan to qualify for a lower rate. However, you do this at your own risk.

Another type of installment loan would be home loans, or better known as a mortgage. You will borrow the value of your house, and then agree to repay it with interest included in monthly increments. This is often done over a period of 15 to 30 years.

In the case of mortgages, this loan is secured, using your house as collateral. If you miss too many of these payments, you will risk losing it.

There are also home equity loans, which are basically a second mortgage you can take out to pay for home improvements, this is also an installment loan.

Auto loans are another example. You will borrow the costs of the vehicle and may payments plus interest each month over two to six years to pay it off. If you miss payments, the lender can then repossess the vehicle.

Finally, there are student loans. They are installment loans because you pay them in regular payments over time, although they do differ in other ways from the rest of these installment loans. Their interest rates can be fixed, or they can vary, however they will typically include a period after you have borrowed money when interest starts to build, but monthly payments have not yet begun.

Secured Vs unsecured installment loans.

A secured installment loan means that the loan is secured by collateral, often meaning the interest is lower as the lender has coverage that their funding is secure. An unsecured installment loan means that the loan is not secured by any collateral, meaning that there is more risk for the lender, and this is why there will usually be a higher interest rate.

Hom loans, be they mortgage or home equity loans, as well as auto loans are good examples of secured installment loans. Whereas student loans and personal loans are examples of unsecured installment loans. Although, you can get personal loans as secured installment loans.


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