In banking, an installment loan is a loan, where the amount is paid out in one lump sum and you repay it in more than one installment. Thus, they contrast with a bullet loan, where the amount borrowed must be repaid all at once. They also differ from revolving credit installment loans, where neither the amount borrowed nor the resulting monthly installments remain the same.
Installment Loan Terms and Repayment
Normally, the loan interest rate is recorded in the loan agreement and remains unchanged as a fixed interest rate over the entire timeframe of the loan. Repayment terms are determined by the quotient of the loan amount and the amount of monthly payments.
The amount of repayment installments, in turn, is adjusted to the monthly disposable income of the household. Unlike an annuity loan, the repayment installments do not usually include the interest that is additionally incurred. This reduces the annuity, and the total monthly payments change over the course of repayment, even if the repayment amount remains the same.
What Types of Installment Loans Are There?
Installment loans are granted both as unsecured loans and as secured loans.
Unsecured loans include personal loans or student loans, for example. If a borrower’s creditworthiness is not sufficient for such loans, a guarantee by a co-signer may also be required by the bank.
It is also possible to take out a secured installment loan. Classic examples are mortgage loans, home equity loans, or car loans, where the loan is secured by the equity of the home or the value of the car. Another form of collateral can be an assignment of wages and salaries, which is agreed upon in the contract. In this case, the interest rates are usually somewhat lower than in the case of loans without collateral.
Benefits of Installment Loans
They Come With Predictable Payments
When getting an installment loan with fixed interest rates you know right away how much you have to pay in which month of which year. This predictability makes it easier for you to budget and not miss any payments.
Certainty of Paying off the Loan to a Specified Date
Contracts for installment loans usually include fixed payment dates. Therefore, you know exactly by when you will have paid off your debts and can plan accordingly.
Process Can Be Completed Online and Fast
With the wide range of online lenders, you can quickly find the right loan for you. You do not even have to leave the house for the digital application process.
They Can Help You to Build Up Your Credit Score
Even with bad credit, you can take out a personal loan as an installment loan. If you do so and make on-time payments, you can improve your credit score and take advantage of cheaper loans in the future.
Who Can Get an Installment Loan?
In general, there is a suitable installment loan for almost everyone who wants one. It is the most classic form of a consumer loan but can also be taken out by companies as investment loans for example. Installment loans are among the standard products of all traditional banks and credit unions as well as online lenders.
Even with a less-than-perfect credit score you might be able to get an installment loan. However, with a credit score below 630, you must expect higher interest rates or necessary collateral.
Some lenders also require a certain debt-to-income ratio. Of course, the various types of installment loans differ. For a home equity loan, for example, you need to own a home, while for a car loan you need to buy a car, of course.
Where to Get an Installment Loan?
Whether banks, credit unions, or online lenders, you can get installment loans almost everywhere loans are offered. With online lenders, comparison portals provide an optimal overview of the wide range of offers, and because of the fast, mostly automated processing of applications, the money is usually on your account by the next business day. In addition, the origination fees are usually lower with online lenders than with traditional banks.