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An installment loan is a lump sum of money that you borrow and then repay at fixed intervals. Installment loans are often used to finance a major purchase, such as a house, car or boat, or to fund education, although you can get an installment loan for almost any reason.
If you’re wondering what an installment loan is, you’ve come to the right place. Learn more about how installment loans work, the pros and cons, and how to get an installment loan.
An installment loan is a type of loan that lets you borrow money and pay it back in equal monthly installments or another predetermined schedule. You repay the principal loan amount, plus interest, in fixed monthly installments until you have repaid the loan.
Installment loans usually have a fixed interest rate that does not change for the life of the loan. However, some installment loans, such as private student loans, have a variable interest rate that can change while you pay off the loan.
Some installment loans also charge an origination fee to process your application. Depending on the type of installment loan, you may have to pay a prepayment charge if you prepay the loan. But if you don’t make payments according to the repayment terms or make late payments, you could incur additional charges and hurt your credit score.
Installment loans work differently from revolving credit, like a credit card. Revolving credit, like a credit card or line of credit, lets you borrow money and pay it back over and over again, while making payments on an installment loan until it’s due. refunded in full. Payday loans are also different from installment loans in that you repay a payday loan in a lump sum instead of fixed installments.
Installment loans can be secured loans, which means they are backed by collateral, or unsecured loans, which are not backed by collateral. Mortgages and auto loans are two types of installment loans that are secured. Examples of unsecured installment loans include student loans, personal loans, and debt consolidation loans.
A mortgage is one of the most common types of installment loans used to purchase a house, condo, or land. Most mortgages are repaid at fixed interest rates over 15 or 30 year terms. Your home is collateral for a mortgage, so if you don’t make the payments, your lender can foreclose on your property.
Auto loans are also installment loans which are secured loans. Since your vehicle serves as loan security, it can be repossessed if you don’t repay your car loan. Repayment terms generally range from 24 months to 84 months, with the most common being 72 months.
A student loan is an installment loan, whether you borrow from the federal government or a private lender. The standard repayment term for a federal student loan is 10 years. Federal student loans have a fixed interest rate. For private student loans, repayment terms vary by lender. Private student loan interest rates can be fixed or variable.
A personal loan is a form of installment credit that you can take out for almost any reason. You borrow a lump sum of money and then repay it at regular intervals. Common reasons for taking out a personal loan include medical bills, home improvement projects, debt consolidation, or paying for a wedding or vacation.
A debt consolidation loan is a personal loan you use to combine multiple debts into one monthly payment, often at a lower interest rate. Since more of your monthly payment goes toward the principal balance, a debt consolidation loan can reduce the time it takes to pay off debt. APRs range from 6% to 36%, depending on your credit score.
Buy now, pay later services like Klarna and AfterPay offer a form of tiered credit. You typically split the purchase price into four interest-free installments. Installment payments are charged to your debit or credit card.
Installment loans have several advantages and disadvantages that you should be aware of.
Here are the benefits:
And here are the cons:
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