What is an Installment Loan?

25 Jan 2021

A term loan is a type of loan that allows you to borrow some amount of money upfront from a lender. Unlike other revolving credits, such as a credit card and a line of credit, which allow you to get funds every time you make a purchase, term loan is a specific amount of money borrowed for a fixed time period; you have to decide the amount you need before borrowing the funds.

Once you get the funds, you have to repay the loan every month, schedule may vary, over a fixed period of time decided by you and the lender. This monthly payment is known as an installment and this type of credit is known as an installment loan.

Common types of installment loans

 Most loans, like personal loan, auto loans, mortgage, education loan, etc. are considered installment loans.

Personal loans

A personal loan is a type of installment loan you can borrow to meet urgent and unexpected financial requirements. As there is no restriction on use of a personal loan as long as it is used for a legitimate reason, you can use it for a variety of purposes, like debt consolidation, home renovation, exotic vacation, child’s marriage, medical bills, big-ticket purchase etc. Personal can be borrowed for a period of 12 to 96 months. Since they are collateral-free, personal loans are typically costlier than other types of loans. Rate of interest generally ranges from 4% to 36%. Rates and terms & conditions may vary from lender to lender; you should compare personal loans from multiple lenders.

Auto loans

A car loan is a type of installment loan you can get to finance a new or used car. You can get a car loan from bank and other financial institutions for 12 to 96 months, with interest rates generally between 3% to 15%. 

Home loans

A mortgage is a type of installment loan offered by banks and other financial institutions to purchase, build, renovate a house. You can also get a home loan to buy a plot to construct a house thereon. Mortgages typically have terms between 15 years to 30 years, and are offered on fixed or adjustable interest rate.

Student loans

Education loan is a type of installment loan. Education loans are designed to help bright and ambitious students fulfill their dreams of getting a higher education from top universities/ colleges/ institutions around the world.

More: Best Student Loans 2019

Benefits of installment loans

Easy to anticipate: In most cases, installments loan has a predictable payment; the borrowers already know how much payment they would be required to make per month, and the installments are likely to remain same until the loans is paid off. With a predictable payment amount and schedule, it is easier to budget for the next month. Whereas in case of credit card, you have to wait for credit card statement to know how much payment you need to make. With an installment, you also know when your loan can be paid off.

Low rates: Installment loans typically come with fixed interest rates for the duration of the loan. An eligible applicant with high credit score can get installment loans at lower interest rates and save hundreds of dollars.

 Disadvantages of installment loans

While installment loans have an array of benefits, they also come with some drawbacks.

Lack of flexibility:

With a credit card, you can increase the credit as you need it. With installment loans, you typically can’t get extra amount once you receive the funds. Instead, you will have to apply for a new loan to borrow extra money. So, before applying for an installment, make sure how much money you need.

Extra charges:

Apart from interest rates, installment loans have other fees and charges, such as origination charges known as processing fee, late payment penalty, prepayment charges for someone who pays off loan ahead of scheduled tenure, credit check fees, etc. which can add more dollars to the cost of credit.

Also, if you have less-than-stellar credit score and you have a poor credit history, you are likely to pay higher interest rate than borrowers with good to excellent credit score and clean credit history.


Most installment loans are common loans that allows us to borrow a set some amount of money when we get a loan. If you want to get an installment loan, shop around for the best installment loan that suits your specific requirements. You should carefully read the terms and conditions of the loan you are applying for, and before application make sure how much funds you need for how long.