What are Installment Loans?

Sometimes life’s financial surprises require a little extra help—and that’s where installment loans come in. With fixed payments and clear terms, they make borrowing simple, offering a straightforward and manageable way to cover expenses.

Let’s break down how installment loans work, their benefits, and how you can get one when you need it.

What is an installment loan?

An installment loan is a type of financing where borrowers receive a lump sum and repay it over a set period in fixed monthly payments. Unlike credit cards which let you borrow as needed, installment loans come with a defined repayment schedule, making them more predictable and easier to fit into your budget.

How do installment loans work?

When you take out an installment loan, the lender gives you the full loan amount upfront as a lump sum. From there, you’ll pay it back through fixed monthly payments over the loan term. Each payment covers 2 portions of your loan: the principal (the amount you borrowed) and the interest (the cost of borrowing).

This helps to keep things simple, with predictable payments and a clear timeline so you can stay on track.

Types of installment loans

Installment loans come in different forms depending on your needs:

Secured installment loans require collateral like a home or car, which the lender can collect if you stop making payments. Common examples include:

• Mortgages: Used to purchase real estate, with the property itself serving as collateral.
• Auto loans: Designed for buying vehicles, these loans are secured by the car that is being purchased.

Unsecured installment loans don’t require collateral, but interest rates are often higher to minimize the lender’s risk. Common examples include:

• Personal loans: Highly versatile, these can be used for anything from debt consolidation to home renovations or medical expenses.
• Student loans: Specifically designed to cover educational costs.  

Specialty loans are used for unique purposes and often come with specific terms or conditions. Common examples include:

• Home equity loans: Allow homeowners to borrow against the equity they’ve built in their home.
• Payday loans: Short-term, high-interest loans intended to provide quick cash until your next paycheck. While they can be helpful in emergencies, they often carry high fees and risks.

Why choose an installment loan?

If you’re looking for a loan option that offers structure and simplicity, installment loans could be the choice for you. Some additional reasons to consider them are:

• Predictable monthly payments
• Clear payoff timeline  
• Fast access to funds  
• Opportunity to build credit

What to consider before applying

Before you apply for an installment loan, it’s wise to take a close look at your financial situation and the loan’s terms to ensure it’s a good fit.

Evaluate your finances

• Define your loan purpose: Is it for a necessary expense (consolidating high-interest debt), or something non-essential (a vacation)?
• Consider what’s affordable: Review your budget to make sure you can cover loan payments without impacting other essential expenses.

Understand the costs

• Compare interest rates: Even small differences can add up. Compare rates from multiple lenders to find the most competitive option.
• Account for fees: Origination fees, late payment fees, and prepayment penalties can increase the cost of your loan.
• Calculate total repayment: Focus on the full cost of the loan, not just the monthly payment.

Know your credit score

• Check your credit score: Your credit score plays a major role in determining your eligibility and the terms you’ll be offered. A higher score can lead to better interest rates and lower costs.
• Review your credit report: Make sure your credit report is accurate and dispute any errors. Even small inaccuracies could affect your application.

How to apply for an installment loan

When you’re ready to apply for an installment loan, the process is straightforward—but it’s still important to be prepared. Here’s a step-by-step guide to help you through:

1. Research your options: Start by comparing lenders, including banks, credit unions, and online providers. Look for the terms that best match your financial needs and preferences.
2. Prepare your documents: Gather the necessary paperwork, like your personal ID, proof of income, and bank account details. Getting everything ready will save you time later.
3. Submit application: Fill out the application with your personal and financial details. Double-check for accuracy to avoid potential delays.   
4. Verify your identity: Upload scanned documents, like a driver’s license or passport, to confirm your identity.
5. Review loan terms: Once you’ve received an offer, review the loan terms, including interest rate, APR, repayment schedule, and any fees. If you’re happy with the terms, accept the offer.
6. Approval and funding: Once approved, the money is typically deposited in your bank account within a few business days.

Managing your installment loan effectively

Once you’ve secured your installment loan, keep up with your payments to avoid taking a hit to your credit. Here are a few practical tips:

• Automate payments: Enroll in automatic payments to avoid missed or late payments.
• Plan your budget: Include loan payments in your monthly budget to keep on track. Whether it’s an app or old-fashioned spreadsheet, staying organized is key.
• Monitor your account: Log in regularly to check your balance, payment history, due dates, and any updates regarding your loan.
• Pay extra when you can: Extra payments reduce your balance faster and can help you save on interest.
• Reach out to your lender: Struggling to keep up? Contact your lender to ask about hardship or flexible repayment options. Being proactive could help you avoid late fees or impacts to your credit.

Reaching your financial goals is much easier when you take a thoughtful approach to managing your loan.

Conclusion

Installment loans provide a simple, predictable way to finance life’s larger expenses while giving you control over your repayment journey. With their structured payments, clear timelines, and flexible use for a variety of needs, they can be an effective tool for achieving your financial goals. Now that you’re prepared with the facts, you can confidently take the next step toward your brighter financial future. 

This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.