Overview of Installment Loans
An installment loan is any type of loan with regular fixed payments over a predetermined length of time. Each payment contains principal and interest and the repayment period depends on the type of loan. Credit cards are not considered installment loans even if they require a monthly minimum payment. Most personal loans, however, are considered installment loans, including:
- Auto loans
- Student loans
Some lenders offer unsecured installment loans, while others only offer secured loans. For those loans, you will need to provide some type of tangible property, such as a car or jewelry, as collateral to the financial institution in case you default on your loan. Many lenders also require payments to be automatically debited from your account each month so that you are less likely to miss your payment.
Short-term Installment Loans vs. Payday Loans
Many borrowers needing cash in a hurry consider short-term installment loans as an alternative to payday loans. Payday loans typically have smaller maximums than installment loans and are paid in one lump sum. Installment loan amounts can often go up to several thousand dollars. The repayment term is also longer than a payday loan, ranging from six months to two years. In addition to higher interest rates, short-term installment loans often also charge additional fees, including credit insurance.
Another difference is that lenders sometimes require collateral, such as cars, consumer electronics or jewelry. Like payday loans, short-term installment loans may be renewed, though this will also typically include additional fees added to your loan amount.
Unlike payday loans, installment loans are reported to the credit bureaus, so if you’re working on rebuilding your credit, they can help increase your score as long as you make timely payments. Of course on the flip side, if you miss payments or your loan becomes delinquent, your credit score will be negatively affected.