Installment Loans

What Is An Installment Loan?

An installment loan is a loan is for a fixed amount which is repaid over time with a fixed repayment schedule. Each repayment contains the interest of the loan along with part of the loans principle.  The terms and interest rate of the loan vary by a case by case basis – as does the length of the loan. Lengths can vary from a few weeks (payday loan) to 30+ years (mortgage).

installment loansExample Of An Installment Loan

Julie borrows $400,000 from the bank to purchase a new beach house in Hawaii, she agrees to a 25 year term with a fixed 5% interest rate with her payment instalments paid monthly. Julie will need to pay $2,338.36 per month. This is one example of an installment loan.

Advantages To An Installment Loan Over A Revolving Loan

  • Lower rates of interest
  • Predictable and constant repayment schedule

Disadvantages To An Installment Loan Over Revolving Credit

 

  • Whenever more  credit is needed another application will need to be made
  • Interest has to be paid on the whole loan even if you’re only utilizing part of the money
An Installment loan is best used when you have something specifically in mind for the loan amount (e.g some type of capital investment such as buying property or refurbishing an apartment). If you’re unsure how much money you’re going to need or how long you’ll need the money for a revolving loan might be best. If you do apply for an installment loan then it’s important to make sure you’ll be able to afford the monthly repayments.

Unsecured Installment Loans

An unsecured loan is one where there is no asset tied to the loan, these typically have higher rates of interest than a secured loan and will often require you to have a good personal or company credit score.

Secured Installment Loans

A secured Installment loan is where an asset is tied to the loan, if monthly repayments are not meet then this asset will be seized to pay off the loan. Because of this security, the interest rate on a secured loan is much lower than that of an unsecured loan. The most common type of secured loans is a mortgage or car financing, in these cases the asset (either the house or the car) is tied to the loan. If repayments are not meet the asset is seized to pay the loan. Generally a down payment is required when the secured loan is tied to the asset that the loan is for.

Short Term Installment Loans

Short term Installment loans are often referred to as pay day loans. This is because they are oft used when money is needed between pay checks. Because the loan period is so short these often have extremely high interest rates (in some cases over 1000%). This might seem extreme but it’s important to remember that the loan term is generally only for a week or two so the total amount of interest you’ll pay will actually be quite low.

Bad Credit Installment Loans

People with bad credit often struggle to get Installment loans, unless they are secured with a strong asset. There are some companies which target people with bad credit histories, because of the increased risk on their part these loans carry higher rates of interest. If you do have bad credit, read our guide on How To Improve Your Credit Rating. 

Before you apply for any Installment loans you must create a budget to make sure you’ll be able to afford the monthly repayments. It’s also recommended that you carefully read through the conditions of the loan – in most cases if you pay off the loan early you’ll still be liable for the interest as if you had not paid it off early.