While it may sound like a highly technical financial term for something very out of the ordinary, the answer to the question of “What’s an installment loan?” may surprise you. If you’ve ever paid for a student loan, financed a car or had a mortgage, you’re likely already very familiar with how an installment loan works. Here are the basics.
An installment loan is a type of loan that allows you to borrow a set total amount and pay it back over a fixed period of time in regular “installments” via a payment schedule. This payment schedule is typically monthly. Common examples of installment loans include auto loans, mortgages, student loans and personal installment loans.
Installment loans involve borrowing a set amount and paying back via fixed, scheduled payments (for example, mortgages and student loans), whereas revolving credit involves using a line of credit, which is renewed as soon as the debt is paid or according to the terms of the contract (for example, credit cards or lines of business credit).
The Core Differences: Typically, revolving credit features a maximum credit limit, but you aren’t expected to borrow the full amount at the start. Also, the amount you pay back monthly is more fluid; you’ll have minimum monthly payments, but how fast you pay back your credit is up to you. How you pay it back affects your credit score. You’ll have access to your line of credit as you pay it off, making it “revolving.” By comparison, once you’re done borrowing on an installment loan, that’s it!
Pros and Cons: There are pros and cons of each strategy. For one, many people prefer the predictable payments and general stability of an installment loan as well as the lower interest rates. For another, credit cards can be a helpful cushion in times of sudden financial duress.
A personal installment loan is a type of installment loan for personal use. Rather than using this type of loan to buy a house, get a car or pay for college tuition, individuals might use this type of personal loan to fix up their home, buy odds and ends or simply get through a pandemic. The use isn’t dictated by the bank and usually not caught up in collateral. For many people, this can be a better alternative than putting a lot of money on their credit cards; you borrow a lump sum and make a consistent payment over the next few months or years. Interest rates are often lower than that of credit cards. When paid on time, personal installment loans can often also help you build credit. They can be easier for a family to budget around.
Many different types of institutions offer installment loans for different purposes, but we’ll focus on personal installment loans. Typically, local banks are a great choice to look at when you search for “installment loans near me.” While national brands do offer options, a local branch or credit union may offer more resources during the process.
