This article addresses the topic of installment loans – what they are, how they work, and how to get them. We also describe how to compare installment loans, their pros and cons, and the impact of bad credit. You'll learn about the popular types of installment loans and how to repay them.
What Is an Installment Loan and How Does It Work?
An installment loan lets you borrow a lump sum of money and slices the debt into manageable portions that you repay on a set schedule, usually monthly. When you accept an installment loan, you or a creditor receives the proceeds as a lump sum. Then, you pay a fixed amount each month by the predetermined due date until the loan is paid off.
The loan is amortizing, consisting of principal and interest amounts whose proportions change over time. Typically, the earliest payments are mostly interest, and the last few payments are almost exclusively principal.
Do not confuse installment loans with revolving credit like that for credit cards and home equity lines of credit (HELOCs). Credit cards and HELOCs require you to pay the minimum amount due each month, but otherwise do not impose a time limit on repayment. Moreover, you can repeatedly borrow and repay the money from the account's credit line up to the established limit.
It's standard practice to set up auto payments for installment loans, in which your bank electronically transmits the fixed payment from your checking account each month. This way, you don't have to worry about forgetting to make a timely payment.
What Are the Differences Between Installment, Personal, and Payday Loans?
Personal loans are installment loans, but not all installment loans are personal loans. What distinguishes personal loans is that you, rather than a creditor, receive the proceeds in cash. Personal loans often do not require collateral, although secured personal loans are available from some lenders.
You can usually get a personal loan with an interest rate of no more than 36%. If the personal loan is unsecured, your credit score will be the predominant factor determining your interest rate and other terms.
Do not confuse installment loans with payday loans. A payday loan is a high-interest, short-term loan. You repay the entire amount in a lump sum, not in installments. The short-term nature of payday loans (typically one to four weeks) helps keep the overall cost in check despite annual percentage rates (APRs) ranging from 300% to more than 2,000%.
Unlike personal loans (and other unsecured installment loans), getting approved for payday loans does not depend on your credit score. In fact, many payday loan sources do not check credit. Instead, they rely on your pay schedule, so you must have a job or other reliable source of income each month.
Installment Loan Examples
The essential terms of an installment loan are the loan amount, the interest rate, the monthly payments, the number of installments, and any tacked-on fees, such as an "origination" fee.
For example, suppose you live in Idaho and want to borrow $4,000 through an installment loan. The interest rate is 10%, and you'd like three years to repay it. The loan charges a $200 origination fee, rolled into the principal. Using the WeLoans loan calculator below, you enter a loan for $4,200 at a 10% interest rate for a 36-month term.
The result is that you'll pay 36 installments of $135.52 each, and the total interest cost will be $678.80.
Installment Loan Calculator
See how much you should pay for an installment loan now.
Monthly Payment
$860.66
- Total Principal Paid:$10,000.00
- Total Interest Paid:$327.97
- Loan term:12 months
What Are Popular Types of Online Installment Loans?
There are many types of online installment loans. Although similar in operation, they each feature unique characteristics and purposes.
Personal Loans
Personal loans suit any purpose, usually without collateral requirements.
Pros:
- Large loanable amounts available
- Lump sum payment for any use
- The interest rate is fixed
- Monthly payments are fixed
Cons:
- Strict eligibility criteria
- Origination and prepayment fees
- Relatively high interest rate
- Monthly payments exceed those for credit cards
Student Loans
Available from the federal government and private lenders.
Pros:
- Federal loans are easy to obtain
- Fixed, standard interest rate
- Federal loans offer deferment and forgiveness[1]
Cons:
- Borrowing limits - private student loans usually start out at $1,000. No minimum for federal.
- Long repayment period
- Substantial interest cost
- Private loan eligibility criteria
Car Loans
Get your next vehicle with an installment car loan.
Pros:
- Obtain a vehicle with a down payment
- Fixed payments
- Timely payments build credit
Cons:
- Cost depends on credit score
- Vehicle repo'd if you default on the loan[2]
- Vehicle depreciation
No Credit Check Loans
Don't let bad credit prevent you from getting an installment loan. Consider getting loans with no credit checks.
Pros:
- Easy, quick approval
- Zero impacts on credit
- Fast funding
- Unsecured loan with no collateral
Cons:
- Not for large loans
- Expensive interest and fees
- Relatively short repayment term
Mortgages
Typically 15- to 30-year terms on loans to purchase a home.
Pros:
- Fixed or variable interest rate
- Fixed monthly payments
- Long-term repayment
- Favorable interest rate
Cons:
- Foreclosure if you default on the loan
- Eligibility criteria, including property ownership
- Long-term commitment
- Substantial long-term cost
Buy Now, Pay Later Loans
BNPL are Interest-free, short-term loans to help you purchase things NOW.[3]
Pros:
- No interest
- Manageable payments
- Easy approval
- No impact on credit
Cons:
- May require a down payment
- Invitation to overspend
- Makes purchases look less expensive
- May create a significant debt
What Are the Benefits and Disadvantages of Installment Loans?
It's vitally important to understand the tradeoffs between an installment loan's benefits and costs.
Benefits
- Budgeting: The fixed interest rates and monthly payments make installment loans easy to budget because you have all the facts upfront.
- Building credit: Paying on time each month can boost your credit score as long as the payments are reported to the credit bureaus
- Possible refinancing: You might save money by refinancing your loan if interest rates drop or your credit score improves.
- Better lifestyle: By spreading payments over many months, you can afford to buy things now rather than wait to save the required purchase price.
Disadvantages
- Not revolving credit: Unlike a credit card, you don't have the flexibility to increase the amount borrowed if needed.
- Commitment: Many installment loans require a long-term commitment, which may interfere with future spending. You can prepay, but watch out for penalties.
- Possibly expensive: If you have bad credit, you'll face a higher interest expense, even if the loan is collateralized. Also, anticipate origination and other fees that add to the cost.
When Is an Installment Loan a Good Idea?
An installment loan can make sense if you put the money to practical use and can afford the payments. Determining what is worthwhile is a personal choice, but you should understand the pros and cons before deciding.
One of the best uses of an installment loan is to consolidate other debts, especially credit card balances. Typically, an installment loan's APR will be less than a credit card's, so you can save money. But remember that installment loans lack the flexibility of revolving credit accounts such as credit cards and home equity lines of credit.
Installment loans are handy when making big-ticket purchases such as a home or vehicle. Personal loans can provide cash for emergencies or planned uses, such as life events.
It can be challenging to access an installment loan if your credit is poor. Consider recruiting a co-signer to increase loan availability and decrease cost.
Be aware of the negative impact your credit will suffer if you default on a loan. Your credit score will drop, and the stain will remain on your credit reports for seven years.
How to Qualify for Installment Loans Online?
To qualify for an installment loan, you may have to satisfy the following requirements:
- Age 18 or higher
- US citizen or permanent resident
- Provide personal details
- Provide Social Security Number
- Have a reliable source of sufficient income
- Have a checking account in your own name
- Have a valid phone number and email address
- Meet the credit requirements of the lender
- Provide collateral if required
How to Get Installment Loans?
Although most installment loan providers offer online applications, some folks prefer to apply in person. Both avenues are available.
In-Person
You can apply in person at the branch of your local bank or credit union. This method suits consumers who like the personal touch of speaking directly to a person across a desk. You may have to set an appointment and, of course, make travel arrangements. Note that many banks (and to a lesser extent, credit unions) may require you to have a solid credit record and low amounts of debt relative to your income.
WeLoans offers a state-by-state loan-finding service if you aren't sure where to apply for an in-person loan in your area. Just enter your zip code, street, city, or state below to get started.
Find Installment Loans Stores Near Me
Online
The easiest way to apply for an online installment loan is through a loan-finding network such as WeLoans. The process is convenient because a single loan request can generate multiple offers.
You can apply online to a direct lender for an installment loan if you prefer. Remember that if you want to loan-shop, you'll have to fill out a separate application for each lender.
In either case, you may have to provide copies of important documents, such as a driver's license, tax returns, bank statements, and others.
How Compare Installment Loans?
Several factors help you determine the best installment loan for your needs. They include the available loan size, the repayment term, and costs (i.e., interest rates and fees). Convenience can also be a factor, such as getting an auto loan from your car dealership or a personal loan from your credit union.
To choose a loan intelligently, perform some preliminary steps first, such as:
- Reviewing your credit reports: You can get free copies from AnnualCreditReport.com.[4] You can dispute mistakes hurting your credit score by contacting the three major credit bureaus.
- Evaluate your budget: Know how much you can afford to borrow in terms of monthly payment amounts. It's not a good idea to borrow the money you can't repay. You may find you need an installment loan's term to stretch over a specific period to make it affordable, so focus your search on lenders that provide reasonable loan terms.
- Prequalify first: Online lenders, especially loan networks, can prequalify you for a loan by checking basic criteria. It doesn't guarantee final acceptance, but it's an excellent place to start and won't impact your credit.
You'll want to gather all your information and documents in advance to facilitate the application process.
How Do I Repay My Loans?
First and foremost, you want to ensure you never miss a payment. Most lenders let you set up automatic payments directly from your bank account, which is an excellent idea. Going paperless may also qualify you for a lower APR.
You may be able to reduce interest costs by accelerating your payments but be careful to avoid any prepayment penalties. You can pay down your loan faster by sending more than necessary each month or making a few extra payments per year.
How Long Do You Have to Pay off an Installment Loan?
An installment loan's term depends on the loan type. At one extreme, buy-now-pay-later and no-credit-check loans may offer only a few months to repay. At the other extreme, mortgages typically run from 15 to 30 years.
You need a loan term long enough to accommodate your monthly budget. But to minimize overall cost, you don't want to stretch a loan term further than necessary, or else you'll end up paying interest that you could avoid.
Can I Have Multiple Installment Loans?
Yes, you can have two or more simultaneous installment loans, which is not unusual. A classic example is a person who is paying off student loans, a mortgage, and an automobile loan.
Some lenders may balk at offering you a second loan until you've made a set number of payments on the first one. Naturally, it's easier to get a second loan if it is collateralized, as is the case for a mortgage or car loan. You may be able to consolidate some or all of your debt to reduce the number of existing loans.
Do Online Installment Loans Require Credit Checks?
Most but not all online installment loans require a credit check. Some lenders offer no-credit-check loans, which means they don't perform any form of credit checks when you apply. Hard inquiries for your credit reports can impact your credit score and may disqualify you if your credit is poor. No-credit-check loans bypass this problem but usually are significantly more expensive than traditional loans.
Online networks such as WeLoans do not perform hard credit checks when you attempt to get a loan.
Can I Get Approved for Installment Loans With Bad Credit?
Bad credit need not disqualify you from getting an installment loan. True, it may rule out big banks and other traditional lenders, but many online lenders are more flexible. Federal student loans don't depend on your credit standing, and collateralized loan providers often care more about the underlying property than your credit score.
For example, WeLoans welcomes subprime applicants and works with many lenders providing bad credit installment loans on its network. Naturally, a low credit score may require a higher interest rate and/or origination fee.
How to Improve My Chances of Getting Bad Credit Installment Loans?
Here are some tips to help in the short run:
- Make a larger down payment: Mortgages and bad credit car loans usually require some minimum down payment. You'll improve your approval chances if you can substantially exceed the minimum because it reduces the balance due and puts some of your skin in the game.
- Recruit a co-signer: A co-signer with good credit can help you sidestep the restrictions on subprime borrowers.
In the long run, you'll want to rebuild your credit through timely payments and low amounts of outstanding debt.
Can an Online Installment Loan Help Improve Your Credit Score?
Almost all installment loan providers report your monthly payments to at least one of the major credit bureaus (Experian, Equifax, TransUnion). That sets the stage for credit improvement, but only if you consistently pay your bills on time. It also helps to keep a cap on your debt amounts relative to your income and available credit.
If you have one or more credit cards, you probably have access to your credit score each month. Keep track of it to ensure it's going in the right direction. Creditworthy behavior should help boost your credit score within a year.
References
- Student Loan Forgiveness – Federal Student Aid
- Vehicle Repossession - Federal Trade Commission
- What is a Buy Now, Pay Later (BNPL) loan? – Consumer Financial Protection Bureau
- 3 steps to your free credit reports – AnnualCreditReport.com