What Is An Installment Loan? [A Beginner’s Guide]

An installment loan is a method of borrowing a fixed amount of money, commonly for the purchase of things, such as cars, homes, college education, etc.

The borrower gets a lump sum of money and repays it over a set period of time, in monthly payments, with fixed or variable interest rates. The term of repaying a loan can be varied, depending upon the type of installment loan you are borrowing.

Types of Installment Loans

An installment loan has two main types; Secured loans and unsecured loans.

Secured loans required collaterals i.e., they are backed up by the assets of the borrower, home in case of a mortgage loan, and the vehicle in case of an auto loan. If you failed to repay your loan, you will lose the possessions of your belongings to the lender

Unsecured loans do not require any collaterals, personal loans and student loans are the common types of unsecured loans. You just have to repay the borrowed money in a set term of time, with some interest rates.

Examples of Installment loans

Installment loans cover a wide of loans:

Mortgage Loans

If you want to buy a home and do not have enough money, a mortgage loan is a solution for you.

Mortgage loans are the loans that you borrow when you want to buy a house. It is a secured loan. Therates of interest can be fixed rates or variable rates- the rate can change if the market rate changes.

The mortgage loans can be repaid over the time of 15 to 30 years. But you have to pay more money in interest, if your period of paying back the loan is long. For example, if you take an amount of $200,000 with a fixed interest rate of 4% and repaying time is 30 years, you will be paying an extra of $140,000 in interest.

Auto Loans

Auto loans are loans, which are borrowed when you want to buy a vehicle. Auto loans are a very common type of loan people borrowed because buying a car can be expensive. These are the types of secured loans just like mortgages.

Auto loans can be repaid in monthly installments with periods of 1 to 7 years. Loans that are repaid over long periods come with low monthly payments, but you are eventually paying more money in interests.

Personal loans

Personal loans are the loans that can be used for any personal purpose by the borrower such as, medical expenses, college or for wedding expenses, etc. These loans are offered in smaller amounts and can be availed from private lenders, online lenders, and credit unions.

These are a type of unsecured loans, meaning they require no collateral and usually come up with higher interest rates because the lender has no backup, as he has in secured loans.

Personal loans can be repaid over time periods of one year to five years. You can get these loans on fixed rates or variable rates. Most personal loans have fixed interest rates and the person who borrows them pays the fixed amount of money every month for the set time.

Student Loans

Student loans are the loans that are borrowed by a student to pay his college expenses such as, college fees, expenses for books, hostels, and other educational expenses.

These loans are different from other loans when it comes to paying them back. Students who borrowed the loans do not have to repay the loan until after six months of their graduation.

Student’s loan can be of two types; private loans and federal loans. In federal loans, the government lends money to students, while in private student loans, students borrow money from private companies. Federal student loans are better than private loans due to the easy interest rate terms.

Installment Loans and the Credit Score

Your credit score plays an important role, when yougo to a lender to borrow money, the better your credit score, the easier you will be able to get a loan on easy terms. Because a good credit score is proof that you are credit worthy. A credit score above 740 is a good credit score. The key to maintain a good credit score is to pay your bills on time and to pay  your credit card debt as much as you can.

But, there is no need to worry if you have a bad credit score, you can borrow money. But this money will come with higher interest rates and on some hard terms.

Advantages of Installment Loans

Fixed and Lower Interest rates

You can borrow loans in installments at much lower interest rates than credit cards. Most of the loans come with fixed interest rates that mean you have to pay a fixed amount of money every month for a set period of time. And the change of the interest rates doesn’t affect your monthly payment.

Lower Monthly Payments

A major advantage of installment loans is that you can repay loans in a smaller amount of money every month because they come with long periods of payback time, which can extend to 15 years or 30 years in the case of a mortgage.

A chance to increaseyour good credit score

By paying your monthly installments on time you can get a chance to improve your credit score which can help you in getting future loans easily.

Disadvantages of Installment Loans

A Bad Credit Score

Your credit scores are important for you if you have plan to borrow a loan. If you have a bad credit score, the approval for the your loans can be difficult.

Also, the installment loans can seriously damage your credit score if you fail to pat back your monthly installments on time, and damaging your chance of getting loans in the future.

Losing your Assets

As some of the installment loans are secured that is they require your assets as security for your loan. If you failed to pay back your loan you can lose your assets which you put up as collateral.

Wrapping Up

Installment loans are in short easy to get if you are meeting certain requirements. They are easy to repay because of the monthly installments with easy terms. But if the case of default you might end up getting your credit score hurt and can even lose the assets that put up on collateral.

So, installments loans are a good option for you when you need money to buy a house or car but are sure to pay back on time.