Key Takeaways
- An installment loan is a loan that you get in a lump sum from a lender that you have to pay back through a series of scheduled payments.
- It covers a broad category of loans such as mortgages, auto loans, or short-term personal loans to help with emergencies.
- Always research your options before applying for a loan of any kind.
As nice as it would be to have extra cash sitting in a bank account to help with everything from the holidays to dealing with a minor emergency expense, the truth is, most people don’t have these accounts. In fact, according to a recent survey, over 1 in 5 Americans don’t have emergency savings[1]. If you find your budget too tight and you are unable to cover expenses at some point, installment loans might be able to help. But before you even consider applying for one, it’s important you take the time to understand the important details that make them what they are. Today, we’re going to give you a simple installment loan definition, take a look at some common examples of installment loans, and go over some of their potential benefits. Let’s get started!
Installment Loan Definition
In the simplest of terms, an installment loan is a lump sum of money that you borrow from a lender. You’ll need to pay it back (along with interest and/or fees) in a series of scheduled payments that can span anywhere from a few months to several years. Some of the important details of your loan, like the amount you’re approved for and the length of your loan, can be based on all sorts of factors, like:
- the type of installment loan
- the lender you’re working with
- your income
- your credit history
Once you’ve paid off your loan, the account is generally considered to be closed. This means that you’ll need to apply for a new loan if you need money again. This is a key distinction from variable loans like credit cards and lines of credit where you’re able to access available funds within your credit limit as you need.
The last thing we want to go over is that installment loans can either be considered secured or unsecured. With secured loans, you’ll need to put up some form of collateral to qualify. Collateral is an asset that a lender can take as payment if you default on your loan. It can be things like cars, homes, and more.
With unsecured installment loans, you won’t need any collateral, but you may see higher interest rates than you would with a secured loan.
3 Common Examples of Installment Loans
Like we mentioned, there are different types of installment loans. The loans we’re about to go over are common examples of installment loans; you might even have one yourself!
1. Short-Term Personal Installment Loans
This type of loan can technically be used for anything, but they’re usually meant to be used to help you handle an emergency expense when you don’t have an emergency savings fund at the ready.
Unlike the other loans we’re going to talk about, these loans are usually going to be unsecured. So, you’re not going to need to offer up any collateral, but because of that they also might come with higher interest rates than certain other types of installment loans. It’s also helpful to know that your repayment period could span a couple months or even a few years.
2. Mortgages
If you’re a homeowner, then there’s a good chance you have a mortgage right now. This is a type of installment loan that’s specifically meant to help you buy a home.
The way this works is that you’ll put down a down payment (a portion of the total value of the home) towards the home you’re buying, and the mortgage will fill in the gap between your down payment and the total amount you’re buying the home for. You’ll then pay off the mortgage over the course of many years. These payments will generally be made up of a portion of the principal of the loan balance – the original amount of money that you’ve borrowed and have to pay back – plus interest, insurance, and taxes.
Because the size of the loan is so big, the payments are usually spread out over the course of many years. The length can vary, but it’s common to pay back your mortgage over a 15- or 30-year term[1]. These loans are considered secured. The collateral you’re putting up is the equity (the amount you own) you have in your home.
3. Auto Loans
Like mortgages, auto loans are mean to be used for a specific purpose. In this case, they’re used to help you buy a vehicle. And like mortgages, they’re also usually secured. The collateral that you’re putting up in this case is the car you’re buying.
The amount of time it takes to pay off an auto loan can vary, but they generally range between 36 and 72 months[2]. Like most installment loans, the longer the term, the lower your monthly payments may be. Having said that, a longer term can come with a higher interest rate, so you’ll actually be paying more over the course of the loan than you would be with a shorter term.
You’ll need to review your vehicle insurance coverage to see if the loan requires repayment if the vehicle is damaged or stolen. Make sure to review and discuss these terms in the loan agreement with the financial institution.
Research Your Options Before Applying for Installment Loans
There are all sorts of reasons you might need an injection of cash to help you out. Maybe you’re looking to make a big purchase like buying a house or car. Or maybe your back is against the wall and you need some help to deal with an emergency expense. Whatever the case may be, there might be an installment loan out there to suit your needs.
Just remember that whenever you’re making a big financial decision like applying for a loan, it’s important to do your research and be wary of loan scams. Otherwise, do your research and look for something that suits your situation.
Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.
[1]https://www.bankrate.com/banking/savings/emergency-savings-report/
