An installment loan is a type of consumer loan wherein the principal amount loaned plus the interest and any other fees or charges are paid off through fixed monthly payments during the length of the loan period.
Most installment loans are taken out to purchase a home, car, furniture or any other big ticket item. An installment loan comprises of specified amounts that need to be repaid over a prearranged repayment period. Most installment loan monthly payments include the entire amount loaned, meaning both the principal and the interest are factored into the monthly amount or it may only contain the interest amount with the principal being paid in a lump sum at the end of the repayment period.
Installment loans are referred to in the industry as either secured or unsecured.
Unsecured loans are considered riskier for lending institutions hence are usually only available at higher interest rates. The borrower’s credit score is the prime factor for approval of an unsecured loan. Employment status and previous credit payment history are also important deciding elements. Most common examples of unsecured loans are personal loans and student loans.
Secured loans are those offered by a bank or financial institution using collateral. With a secured loan, the bank or financial institution has the right to seize and even sell the property put up as collateral if there is failure to pay back the loan. The upside to this type of loan, though, is that the interest rate is comparatively lower than those of an unsecured loan. Generally secured loans are taken out for mortgages, home or auto equity loans.
Installment loans are considered to be the most popular type of loan, preferred by more borrowers than other loan types because there are certain advantages of installment loans, making them the better choice.
With installment loans, the monthly payment amount is known to the borrower and does not change throughout the duration of the loan. A borrower who takes out an installment loan will have the time necessary to work out a budget for the loan every month and be able to make the best financial decisions.
Whether you decide if an installment loan is the kind of loan for your needs it is still best to weigh all your financial options and choose a credit facility that offers you the best terms that will be comfortable for you.