Loan Education: What is an Installment Loan and How Do They Work


As of late 2020, the total US consumer debt was a staggering $14.2 trillion, with the average American being $95,727 in debt. Debt is good or bad, depending on how you manage it.If you need extra cash, then why not consider taking an installment loan? You’ve probably heard of installment loans, but what are they, and is taking them a good idea? If you have no clue, then maybe it’s time for some loan education.An installment loan, as the name connotes, is any loan that you repay in installments. It’s an umbrella term representing both personal and commercial loans. Any loan that you pay in regular intervals stipulated by the lender is an installment loan.In this post, we’ll be delving into what an installment loan is and why you should consider taking one.What Is an Installment Loan?As mentioned above, an installment loan is a broad term for any loan that you pay off over time in regular installments. Installment loans encompass mortgage, personal, auto, and student loans. Most installment loans have a fixed interest rate and equal monthly payments.Auto loans and fixed-rate home loans are the most common types of installment loans. However, some student loans and even mortgages can be installment loans. Some lenders may refer to installment loans as closed-end credit.How Does an Installment Loan Work?Installment loans enable borrowers to access large sums of money for massive purchases. The borrower then makes small payments over the specified repayment period. With repayment periods that could extend over several years, it makes massive purchases like buying a house or vehicle seem more affordable.The lender gives you a lump sum amount, then calculates your monthly or bi-weekly payments. Each monthly payment reduces your total loan amount until your balance gets to zero. Interest and other operating costs are also included in the regular payments.The lender should tell you the monthly payment they expect before processing the loan. Some personal loan lenders might offer preliminary monthly payment quotes that won’t touch your credit.It’s worth noting that most of your initial payments go towards paying off your interest. As such, the first few payments are typically smaller than the subsequent ones. Eventually, the small payments add up and clear your entire debt balance, covering both the loan and interest.Types of Installment LoansAs mentioned earlier, there are many types of installment loans. Here are some of the most common ones:-Personal loans: You can get unsecured personal loans from banks, credit unions, and other financial institutions. Some lenders offer personal loans as installment loans for various purposes.Home Purchase Loans: This is your conventional thirty or fifteen-year mortgage paid in regular installments.Student loans: Student loans are installment loans that affect your credit score. You’ll have to pay back your student loans in installments after you complete your education.Home equity loans: You can borrow against your home’s equity and pay back the loan amount in installments.These are just a few of the several types of installment loans. Other types of installment loans include RV loans, dental loans, and even fertility loans. Any loan that borrowers repay in regular payments is an installment loan.Pros of Installments LoansInstallment loans are an excellent option for anyone looking to make a large purchase but don’t have the cash at hand. Here are a few advantages of installment loans.You can borrow the amount you need: Whether you need a few thousand dollars or hundreds of thousands of dollars, you can get it through an installment loan. Explore various options and settle for lenders with the best installment loans for your financial needs.They are fast: You can apply for installment loans and get one in a flash. Installment loans come in handy during financial emergencies.Great for your credit score: You can borrow installment loans despite your low credit score. If you’re consistent with your payments, you can actually improve your credit score. If you’re looking to take your credit score a notch higher, borrow an installment loan next time you need extra cash.You can borrow online: The internet has made borrowing installment loans a breeze. You can complete your application online and receive your loan right away. This makes it a better alternative to other loan types.Unmatched flexibility: Most lenders let you decide what amount you want to borrow and how long you plan to repay the cash. That way, you can easily manage your finances because you can decide how you plan to pay off the loan.Cons of Installment LoansAlthough installment loans can throw you a lifeline when you’re in the financial doldrums, they have their downsides. Here are a few cons of installment loans.One-time Loan: Unlike lines of credit, an installment loan is a one-time loan. This means you can’t borrow over the loan amount unless you pay back the loan and borrow another one.Hidden Fees: Some lenders might charge special hidden fees that may catch you off-guard. That’s why you need to be careful with the type of lender you settle for.Increasing interest: The longer you take to repay the loan, the higher the interest you’ll have to pay. You’re better off borrowing a loan that you can repay earlier on to avoid hefty interest fees.Prepayment penalties: Most lenders have a hidden penalty if you pay back the loan earlier than you should. This means you can’t escape the high interest because the lender will penalize you for early payment.For most people, the benefits of installment loans outweigh the drawbacks. However, you need to be careful with the lender you settle for.Loan Education for Better Financial DecisionsHopefully, the above information has you up to speed with everything you need to know about installment loans. Remember, comprehensive loan education is imperative to borrowing any other loan. Make sure you liaise with a financial advisor before taking out a huge installment loan for whatever reason.For more informative content, read our other posts on the site.