Installment loans: how they work and examples

An installment loan is a common type of loan that is often used to buy a car, house, or other large purchase. You can even have an installment loan that has another name, such as a mortgage. Here’s what an installment loan is and what you need to know about these types of loans before borrowing.

An installment loan is a sum of money that you borrow and pay back in installments – or installments – over a period of time, usually months or years. Installment loans can be secured by collateral, such as a car, or Insecure.

Installment loans work differently from revolving credit – which you get with a credit card or home equity line of credit – because you borrow the funds all at once. You cannot get more money without applying for a new loan. And installment loans give you more time to pay off the loan, unlike payday loans which require full repayment on your next paycheck.

Personal loans: Personal loans are installment loans that you can use for almost any reason. The loan amounts available range from $ 1,000 to $ 100,000, and repayment terms are typically two to seven years.

A lender decides if and at what rate you qualify for a personal loan using information such as your credit history and score, income, and other unpaid debts.

Unsecured personal loans are more common than secured personal loans, but some lenders allow borrowers to use a savings or investment account or vehicle as collateral so that the loan can potentially qualify for a lower rate.

Real estate loans: With a home loan, or mortgage, you borrow the value of the house and agree to pay it back with interest in monthly installments, usually over 15 or 30 years.

In this case, the installment loan is secured by the home, and after too many missed payments, you may lose it.

A home equity loan – which is a second mortgage you could take to pay for renovations – is also an installment loan.

Auto loans: An auto loan is another example of a secured installment loan. You borrow the cost of the vehicle and make monthly payments, plus interest, over two to six years. If you miss payments, the lender can repossess your car.

Student loans: Student loans are installment loans because you pay them back in regular installments over time. They can, however, have fixed or variable rates, and they usually include a period after you’ve borrowed the money when interest accumulates but monthly payments haven’t started.

An installment loan application generally requires a firm credit check, which can temporarily lower your credit rating by a few points. Beyond that, installment loans can strengthen your credit, as long as you make regular and on-time payments.

Reputable lenders report payments on time to at least one of the three major credit bureaus, Equifax, Experian, and TransUnion. Payment history is 35% of your credit score, and loan installments help build that history.

The consequences of missed or late payments can be serious. Paying more than 30 days late can reduce your credit score by 50 to 100 points. Most lenders have the option of setting up automatic payments, which takes the pressure off of remembering to pay.

• Compare. Lenders use different methods to assess your loan application and assign your rate, so it may be beneficial to compare installment loans from multiple lenders. Also consider other forms of financing, such as low interest credit cards or lines of credit, which can be cheaper, especially for large expenses.

• Pre-qualified. Being pre-qualified for a personal loan or pre-approved for a mortgage allows you to see loan amounts, rates and potential payments without affecting your credit score. You can then assess the impact of the payments on your budget.

• Boost your application. Before applying, consider solidarity or co-signed installment loan or get an unsecured loan with collateral. These options can help you qualify or get a lower loan rate or a higher loan amount. Just be aware that there are consequences if you are unable to repay the loan: your co-signer will be on the hook, or the collateral could be taken.

• Apply. Installment loans are available at banks, credit unions, and online lenders. The time required to apply varies depending on the type of loan and the lender; online lenders generally offer faster processes.

Borrowers with a thin or imperfect credit profile may be able to get an installment loan with bad credit (less than 630 FICO). Some lenders have lower credit score requirements and take other information into account, such as banking transactions, employment, education, and existing debts. Credit unions and online lenders typically work with bad credit borrowers, while banks tend to charge good to excellent credit.

Lenders must disclose a loan’s annual percentage rate (interest rate plus all other fees), and personal finance experts say the 36% APR is the maximum rate for a loan to be affordable.

But you will find installment loans with rates of 100% or more. Lenders who offer high interest installment loans may not check your credit and ability to repay the loan or report payments on time to the credit bureaus. These are red flags that indicate that the loan is at best too expensive and at worst predator.

A personal installment loan can be an expensive way to cover an emergency. Try these options first.