What Is An Installment Loan?

Have you ever heard of an installment loan? Not sure what that means? An installment loan is a common credit product. You may already have one or two installment loans.

Installment loans (also called installment credit) are closed-ended credit cards that you repay over a certain period. They can or may not have an interest. Learn more about installment loans and their workings.

How Does An Installment Loan Work?

An installment loan is a loan that you borrow money for or purchase an item. In regular payments known as installments, you pay off the loan – sometimes with interest – in regularly scheduled payments. The amount you owe on each installment is usually the same for a specific number of weeks, months, or years. After the loan is fully paid off, the account will be closed permanently.

An alternative to an installment loan is a credit account. This works much like a credit card. Revolving credit has an open-ended nature, unlike installment credit. This means that it can be used again and paid off as many times as the account is still open and in good standing.

Types Of Installment Loans

There are several types of installment loans. You can choose to have them secured or unsecured. This means that you may need an asset (or “collateral”) to repay the loan. Every loan has a different interest rate, repayment term, and fees. Shopping around is a great idea, no matter what your needs are.

Here are some examples of the most commonly used types of installment loans:

Auto Loans

Auto loans are available to help you purchase a used or new car. Most auto loans have fixed interest rates and repayment times that can range from two to seven years.


A mortgage is used for the purchase of a home and is secured by the mortgage. There are many different types of mortgages. The most popular mortgages are those that can be repaid in 15-30 years.

Student Loans

Federal and private student loans can be unsecured. These loans can pay for undergraduate and graduate educations. You don’t usually have to begin repaying student loans immediately, unlike other installment loans. You can, however, wait until you graduate to find a job.

Personal Loans

Personal loans are not required to be used for specific purchases, unlike student loans, auto loans, or mortgages. Personal loans are available to help pay unexpected bills or consolidate existing debt. Most personal loans can be used without collateral.

Pay-Later Loans, Buy-Now

You may have noticed a buy now, pay later loan, also known as point-of-sale financing. This option is available at some retailers. Pay-later, buy-now loans allow you to spread your payments over a few months instead of having to pay for what you bought immediately. Depending on the retailer and purchase, the repayment terms can vary from a few weeks up to several years.

Pros To Installment Loans

As with all credit, installment loans have pros and cons. It depends on your situation whether you think it is the best choice. 

  • Loans To Pay Large Costs: Installment loans are a fast way to get the money you need to buy larger items.
  • Predictable Monthly Payments: When you take out an installment loan, it is easy to know how much your monthly installments will be. It can also make budgeting much easier.
  • Chance To Refinance: If interest rates are lower or your credit score is higher, you may be eligible for refinancing. This could reduce your monthly payments and/or shorten your repayment time. Refinancing could come with other costs and drawbacks.

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