What is an Installment Loan?

Installment loans let you borrow money and pay it back in equal payments over time, usually with a fixed interest rate. They're useful when you need to make a big purchase or combine credit card debts into one manageable loan.

Common examples include personal loans, student loans, mortgages, and car loans.

How installment loans work

Unlike credit cards where you can keep borrowing as you pay off your balance, installment loans give you a set amount of money upfront. You then repay this amount through regular payments (weekly, bi-weekly, or monthly) over a specific period.

Each payment includes two parts:

• Some goes toward the principal (the amount you borrowed)

• Some goes toward interest

Once you've made all your payments, the loan is closed.

Types of installment loans

Personal Loans

You can use these for almost anything - debt consolidation, emergency repairs, big purchases, or even weddings.

Mortgages

These are specifically for buying homes, with the property serving as collateral.

Auto Loans

Designed for vehicle purchases, available through dealerships, banks, credit unions, and online lenders.

Student Loans

Help cover education costs and are available from private lenders or the federal government.

Payday Loans

Very short-term loans with typically high interest rates, aimed at borrowers with poor credit.

Buy Now, Pay Later Loans

Offered by retailers to split purchase costs into smaller payments, usually without interest or fees.

Secured vs. unsecured installment loans

Secured Loans

Require collateral (like your home or car) that the lender can take if you don't repay. Mortgages and auto loans are common examples.

Unsecured Loans

Don't need collateral but depend on your credit score, income, and existing debt. Personal loans and buy now, pay later options fall into this category.

Effects on your credit

Installment loans can affect your credit in several ways:

• Late payments can hurt your score

• Applying for a loan triggers a hard credit check

• Buy now, pay later loans typically don't affect your credit since they often don't require credit checks or report to credit bureaus

Should you get an installment loan?

An installment loan makes sense if:

• You can afford the regular payments

• Your income is stable

• You'll get some financial benefit from it

If you expect changes in your job or income, you might want to consider alternatives like:

• Personal lines of credit

• Credit cards

• Home equity lines of credit

Making the right choice

Installment loans can be a helpful financial tool when you need to cover large expenses, handle emergencies, consolidate debt, or make major purchases like a car or home. Before applying, take time to understand how different loans work and compare offers from various lenders to find terms that suit your financial situation.

Remember that these loans are long-term commitments—some lasting up to 30 years—so carefully consider whether the payments will fit your budget both now and in the future.