Everything You Should Know About Installment Loans

If you’re at all familiar with loan products, you know that there are often different names for the same type of product. For example, “payday loans” might be considered a “short-term loan,” a “personal loan,” a “term loan,” or to many — just a “loan”. The same is true for installment loans. An installment loan may also be referred to as a “personal loan,” a “term loan,” and in rare cases — even a “short-term loan.”

So what is it that makes an installment loan an installment loan? And what do installment loans have to do with business loans? Let’s examine those questions and more.

What is an installment loan?

An installment loan is a loan that provides the borrower with a lump sum of money up front, which is to be repaid in installments over the course of an established term.

That is why an installment loan may also be called a term loan. If the term is a short period of time (typically just a few months), it could even be considered a short-term loan. However, most installment loans are for larger amounts and are repaid over several months or years. Typically, the larger the amount of the loan, the longer the term to repay.

How is an installment loan repaid?

Installment loans are commonly repaid in monthly payments. Payments are generally a fixed amount every month, and go toward a portion of the principal borrowed plus interest on the loan. Most installment loans will let you pay more than the amount due each month, with the extra repayment amount going toward the principal.

What type of loan amounts are available with installment loans?

The amount a borrower can receive with an installment loan depends on a number of factors, including the amounts a lender offers and the borrower’s credit report. Typically, installment loans are for larger amounts than single-payment “payday loans” and other popular short-term loans. Amounts ranging anywhere from the upper hundreds of dollars (for consumers) to hundreds of thousands of dollars (for businesses) are common. It all depends on the specific type of installment loan and the borrower’s creditworthiness.

Is a personal loan an installment loan?

It can be. A personal loan is simply any loan that is issued for personal consumer use, as opposed to commercial use for a business. While some people and companies may call their installment loans a personal loan, not all personal loans are installment loans — and not all types of installment loans are personal loans!

Are small business loans a type of installment loan? 

There are a number of types of small business funding, but the term “small business loan” typically describes an up-front sum of money provided by a lender to be repaid over an established term. So, yes, the term “small business loan” most commonly refers to an installment loan — one that is designed for businesses rather than consumers.

What are other types of installment loans?

Other common forms of installment loans include auto loans, student loans, home improvement loans, debt consolidation loans and mortgage loans. The way an installment loan is structured is a very common way to structure a loan, so they have a wide variety of uses and applications.

Are online installment loans better than installment loans from a bank or credit union?

Whether an installment loan is better from a bank, credit union or online lender is often a matter of personal preference — and sometimes eligibility. Online installment loans are widely regarded as being faster to apply for and receive than banks or credit unions. Online lenders also often cater to customers who have had difficulty receiving approval from traditional brick-and-mortar lenders.

What are some of the pros and cons of installment loans?

Installment loans are so common as a form of loan due to their simple structure. It’s easy for both the borrower and the lender to establish and understand how the loan will be issued and repaid. Because these loans are so common, the advantages and disadvantages of them are very similar to that of any type of funding.

Pros

• Borrowers can get larger amounts to finance large purchases or investments.
• Payment amounts are typically fixed throughout the term of the loan.
• Borrowers can often save on interest by paying off the loan early.

Cons

• The loan may come with loan fees in addition to the interest, which may be high.
• Late or missed payments can negatively impact a borrower’s credit.
• Borrowers may need more money than what was originally issued.

What’s the difference between secured installment loans and unsecured installment loans?

A secured loan is a loan that is “secured” with a form of collateral. That is, if the borrower defaults on their loan payments, the lender is able to collect the collateral. This offsets risk for a lender and allows them to provide more money and/or a lower rate for the loan. Conversely, an unsecured loan is one in which there is no collateral. These loans will almost always come with higher rates.

Whether or not a loan is secured (collateralized) or unsecured (non-collateralized) often depends on the type of installment loan. For instance, mortgage loans are secured, because the home itself is used as collateral. The same is also true of most auto loans.

For personal loans, unsecured loans are much more the norm. These loans will rely much more on a borrower’s credit score to determine eligibility. They can be more difficult to receive approval for and come with higher interest rates, which are a reflection of the risk a lender takes on compared to a secured loan.

How does an installment loan compare to a credit card?

Installment loans are quite different than credit cards. With an installment loan, a borrower receives all of the borrowed money up front, and repayment is made gradually on a scheduled basis. A credit card is a form of revolving credit, in which a borrower is approved for a credit line up to a certain amount. They can then use the credit card as money up to their approved credit limit. As they borrow, the amount of available credit is reduced. As they repay, the amount of available credit is replenished. This structure makes installment loans better for larger one-time expenses, and credit cards better for regular ongoing expenses.

Can I get an installment loan with bad credit?

Getting approved for any type of loan is difficult if you have a poor credit score. That said, there are certain types of loans that cater specifically to people with less-than-perfect credit. Such lenders may be able to approve customers who are declined for more traditional loans.

Can I get an installment loan with no credit check?

A business loan with no credit check is rare — any credible lender will run a credit check on you prior to approving you for credit/funding. But many lenders are able to determine pre-approval, pre-qualification or eligibility prior to that credit check, and prior to the borrower making a final decision on whether to apply.

Typically, when a borrower is wondering about a credit check, what they’re concerned about is whether a hard credit inquiry (or “pull”) is made, or whether a soft credit inquiry/pull is made. Hard credit pulls appear on consumer credit reports and can impact your credit score, whereas soft credit pulls do not. Soft credit pulls are what lenders use to make those pre-approval decisions, but once you complete the application process, a hard credit pull will be conducted to determine final approval.

The information in this article is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.