What Are Installment Loans? (And How They Can Help)
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Have you ever found yourself needing money? We’ve all been there, I’m sure. Some people find themselves in credit card or medical debt and need a way to pay it off and be free of it. Other people may need funding for long-term goals such as a college education or homeownership. Fortunately, installment loans can help in all of these situations. Before you run to apply, here’s what you need to know about how installment loans work.
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What are installment loans?
Installment loans are a broad term that can be considered an umbrella for many different types of loans. Any loan repaid with regularly scheduled payments — otherwise known as installments — can be considered an installment loan.
When you get an installment loan, you will receive a fixed amount from the lender and be given a payment schedule. Most payment schedules have fixed monthly payments you will make throughout the agreed-upon loan term. Each month, your payment will be split by the lender. Some of the payment will be put toward repaying a portion of the principal amount, which is the amount of money you borrowed with the loan. The rest of the payment will go toward the interest on the debt.
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Types of Installment Loans
When you go to a lender, you won’t be applying for something called an installment loan. Instead, you’ll apply for a specific loan type that falls under the installment loan umbrella.
Secured loans
Secured loans are loans that require some sort of collateral. There are a couple of reasons that you might get a secured loan. Sometimes a secured loan is standard practice for that loan type. Other times, it might be your only option if you don’t qualify for an unsecured loan.
Mortgages
Mortgages are one of the most common types of secured installment loans. When you take out a mortgage, you are using the real estate that you’re purchasing as your collateral. Then if you neglect to make your mortgage payments, the lender is allowed to begin to take over possession of your home. Refinancing your home and home equity line of credit (HELOC) loans can also be considered as part of the mortgage loan category.
Auto loans
Auto loans are another common type of secured installment loan. These loans work similarly to mortgages. When you take out an auto loan to purchase a vehicle, you agree to repay your loan in installments. If you fail to make your payments, the lender can take possession of the vehicle because it serves as collateral for your auto loan.
Personal loans
In some cases, you may qualify for a secured personal loan. These loans require some sort of collateral which the lender can take if you neglect to make payments on your loan. In some cases, a secured personal loan may help you get a larger loan or a lower interest rate because the loan is less risky for the lender than unsecured loans. In other cases, you may only qualify for secured personal loans if you cannot get an unsecured loan due to a bad credit score or other factors.
Unsecured loans
Unlike secured loans, unsecured loans do not require any collateral. These loans are riskier for the lender because they don’t have any collateral to hold onto if you don’t repay your installment loan. That’s why unsecured loans have certain requirements for you to be approved for a loan. Lenders will look at your creditworthiness to determine whether you are able and reliable enough to repay your loan on time.
Student loans
Student loans are a common type of unsecured installment loan. These loans are given based on the borrower and cosigner’s creditworthiness. If you take out a student loan, you’ll repay it monthly over a specified loan term. If you refinance your student loans, that will also be an installment loan.
Personal loans
While you can get secured personal loans, most personal loans are unsecured. Lenders will examine your creditworthiness to determine the loan term, amount, and APR you’re eligible for.
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Installment Loan Lenders and Products
There are a few places where you can get installment loans. First, it helps narrow down the type of installment loan you need. Some lenders may offer better mortgage deals, while others may specialize in student or personal loans. Here are just some options to help you get started on your search.
Banks and credit unions
When you think of financial institutions, your local banks and credit unions are probably the first thing that comes to mind. Banks and credit unions usually offer at least some types of installment loans. If you’re a customer of a bank or credit union already, it’s a good idea to check to see what types of loans they offer. Some banks and credit unions can offer unique loan products and special rates for existing customers.
Some banks that offer installment loans include:
HSBC
HSBC offers personal installment loans in amounts that can range anywhere from $3,000 to $30,000. The bank has no origination fees and may provide lower interest rates to customers with an HSBC account.
Wells Fargo
Wells Fargo offers personal loans in amounts up to $100,000. There is no origination fee, and the bank does not charge prepayment fees. There’s flexibility within the loan amounts and repayment terms; the loan term lengths can be as long as seven years. However, if you’re not a current customer, you may not qualify for all of the features of these personal loans. Wells Fargo customers may qualify for lower interest rates, for example. Existing customers can also apply for a Wells Fargo loan online, but new customers have to visit one of Wells Fargo’s physical locations to apply.
Online lenders
There’s a good chance that your bank or credit union has an online presence, but that doesn’t make them an The term online lender typically refers to lenders that are not banks and cannot offer deposit accounts such as savings and checking accounts. These lenders are restricted to offering products such as installment loans and lines of credit.
Online lenders usually focus on one specific type of loan. Some offer mortgages exclusively, while others focus on student loan refinancing. Some online lenders offer several installment loans, but even then, you’ll probably see one type advertised more than the others.
While you may not qualify for special members-only deals as you might with a bank, there are other benefits of getting a loan from an online lender. First, online lenders often have fewer overhead costs because, unlike banks, they don’t have physical locations to maintain. Some online lenders choose to use these savings to help borrowers save by offering competitive interest rates and fees. Online lenders may also have more lenient because they are not subject to the same federal compliance laws as banks.
One important thing to note is that not all online lenders offer installment loans. For example, some online lenders may specialize in products such as payday loans, which typically aren’t considered to be installment loans.
Some online lenders to consider are:
Avant
Avant is known for being a good lender to look into if you have bad credit. According to the lender, most loan customers have a credit score between 600 and 700. You can borrow between $2,000 and $35,000 from Avant with loan terms that range between 2 and 5 years. The lender does charge an origination fee that can be as high as 4.75%, but it can be well worth it if you’re looking to use a loan to build your credit. Avant’s loans are typically unsecured, but in some cases, the lender may offer secured loans and accept collateral in exchange for a higher loan amount or lower APR.
Lightstream
If you want to be able to pay off your loan in small installments over a long period of time, Lightstream might be what you’re looking for. The lender offers home improvement loans with a loan repayment term of up to 20 years. For its other loans, the repayment terms are between 2 and 7 years. Lightstream does not charge origination fees or prepayment penalties. The lender also does not charge a late payment fee, which sets it apart from its competitors. The only real downside of this lender is that, unlike many other personal installment loans, you have to use Lightstream loans for a specific purpose. Lightstream will ask you what you intend to use the loan for during the application process.
Costs of Installment Loans
Installment loans can be useful in the right circumstances, but it’s important to remember that borrowing money costs money. The exact amount it will cost you depends on several factors, including the type of loan that you’re getting. Lenders can also set their fees, so the cost of loans between lenders can vary even if most of the specifics remain the same.
When looking at installment loans, there are a few costs to consider.
Interest rate
Every installment loan comes with an interest rate, no matter what loan type. It is typically the largest cost you will pay for your installment loan. The interest that your lender charges you is the amount that directly benefits the lender. You will pay interest on top of repaying the amount that you borrowed, and the lender will make a profit from it.
You may also see an annual percentage rate (APR) attached to your loan, which is your interest rate plus additional fees and expenses that may be tied into your loan. There are fixed-rate APRs, which means that the APR is locked in for the lifetime of your loan. This is great to ensure that your payment amounts remain consistent. There are also variable-rate APRs, which can fluctuate over the lifetime of your loan. Variable rates are often slightly lower than fixed rates, but there is uncertainty to keep in mind because you may end up paying a much higher rate later.
Origination fee
Some lenders charge an origination fee for installment loans. The origination fee is a one-time charge the lender uses to pay for your loan's administration and processing costs. In most cases, the origination fee is between 1% and 5% of your loan amount, but it could also be charged as a flat-rate fee.
Not every lender charges origination fees; if possible, it’s usually best to avoid the additional cost.
Late fee
Installment loans have to be repaid at the agreed-upon schedule. Your lender may charge you a late fee if your payment is late. Each lender’s late fee policies are different, and while some may give you a grace period, others may not. Some people find setting up autopay for their loans helpful to ensure no late payments. As a bonus, many lenders offer a discount for auto payments.
Prepayment penalty
It’s not as common as the other fees, but you should watch for prepayment penalties if you shop for a loan. Some lenders charge a penalty fee if you pay off your loan balance before the loan term is up.
It seems kind of silly, because why wouldn’t a lender want to get repaid early? The truth is that if you pay off your loan early, you won’t be paying as much interest over the lifetime of your loan. It’s good news for you, but the lender makes less profit. Some prepayment penalties may be equal to the amount of interest that the lender is missing out on by you paying the loan off early. Other lenders may charge a prepayment penalty equal to a percentage of the balance you paid off or as a flat rate.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
Pros/Cons of Installment Loans
Pros
- Flexibility in loan options. There’s probably an installment loan out there for almost every situation. Personal loans in particular offer a lot of flexibility because they can be used for everything from home repairs to debt consolidation and more.
- Lower interest rates. Credit cards often have a higher interest rate than most installment loans. By using an installment loan to make larger purchases, you may be able to save money over the life of the loan.
- Can have a fixed interest rate. Installment loans often have a fixed interest rate. This allows you to know exactly how much you should set aside for your loan payments each month with no need to worry about it changing on you.
Cons
- Can only get a lump sum. Unlike credit cards, installment loans only allow you to borrow a lump sum of money that must be repaid based on specified repayment terms. In some cases, a line of credit may be more appropriate because revolving credit allows you to borrow over and over again without going through another application process.
- Most require a credit check. When you apply for a loan, you can expect the lender to take a look at your credit history. If your credit report and payment history don’t meet the lender's standards, your application could be denied or you could be charged a higher interest rate.
- Can be risky for your credit. In some cases, a lender might approve you for a higher loan amount than you manage when it comes time for repayment. When taking out a new loan, it’s important to break down your budget to make sure that you won’t struggle during the repayment period.
The bottom line
Installment loans are any loan that is repaid over a series of installments over months or years. They can be anything from secured personal loans to student loans and mortgages. You can use the money from these loans to help you get a new car, consolidate your debt, make home improvements, and so much more.
When it comes to installment loans, it’s important to understand the costs that come along with them. There’s no denying that installment loans can be really helpful, but the money isn’t free. Interest rates and loan terms can vary widely based on the lender and your unique credit history. When you apply for any loan, you should compare lenders to seek the lender that can give you the best deal you need. For some people, going to a bank you’ve done business with for years can be the most comfortable solution. For others, the convenience of getting a loan from an online lender is more attractive. Either way, it’s a good idea to consider your options first to make a well-informed decision before entering a loan agreement.
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Ashley Hart is a lead copywriter and digital marketing expert covering finance, law, real estate, music, entertainment, health and wellness.
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