What is an Installment Loan?

An installment loan is simply a loan that you repay with a set amortization and repayment period. Installment loans are quite versatile and can refer to many different types of loans, since they are essentially just a loan that you receive within a lump sum and pay back over time via a set amount of payments. The “installment” part refers to the installment payments you make on what you borrowed.

Because installment loans refer to such a wide array of financial products, the easiest way to distinguish whether a loan product is an installment loan or not is via: the terms of repayment.

If you are borrowing a set amount of money and paying it back over a set amount of time, this is definitely an installment loan.

In terms of credit & loans, there are two main types of credit products: installment and revolving lines of credit.

If your line of credit has a revolving payback terms and no set “repayment period” than it is not an installment loan and is a revolving line of credit with more versatile repayment terms.

Installment loans include: personal loans, auto loans, student loans, mortgages, second mortgages, other types of secured loan products, etc.

As seen from above, installment loans can really be used for nearly anything. However, for consumers, installment loans will be most frequently be utilized when they are financing a product or service that has a predetermined loan amount.

Whether you are financing education, an automobile, a home purchase, home renovations or just a loan for personal use, installment loans can be used to finance nearly anything so long as your credit permits.

Credit requirements vary much more on the type of installment loan you are looking to acquire.

Personal loans and unsecured loans will likely have the worst repayment terms and APRs and the highest credit requirement. This isn’t because they are “installment loans”, this is simply because they are not collateralized with any property and have higher risk associated for the lender in question. If you default, the lender has no assets/property to recover in the event you fail to repay the loan.

Mortgages typically do not have extremely high credit requirements (so long as you are meeting DTI parameters and making a significant down payment), but depending on your debt to income and credit score, the terms you receive can be substantially worse. So, you really want to have the best credit possible in order to get the best interest rate possible on what you borrow.

Secured loans like mortgages, second mortgages, etc., can have greatly varying credit requirements depending on your LTV and the amount of equity in your home as well. A lender is not likely to give you a second mortgage if you have an 80% LTV and just acquired the mortgage 6 months ago.

Auto loans are typically even easier to qualify for, again these are secured loans and a lot of this depends on how much of a down payment you making when purchasing the vehicle. If you don’t repay what you borrow, the lender will repossess the car you purchased. Therefore, there is less associated risk for lenders.

Alternatives to Installment Loans

The most common alternatives to installment loans will be:

Home Equity Line of Credit

HELOCs, which are revolving line of credit that are collateralized with the equity in your home. Again, these are not installment loans, because you borrow as much as you like. You may have a 300k HELOC, but you can borrow $10,000 against it if need be and repay it as you go.

Revolving Line of Credit

A line of credit most commonly borrowed from you bank. These are very similar to HELOCs but the main difference is that they are usually unsecured.

Credit Card/Other Revolving Lines of Credit

Credit cards can be used to finance purchases just like installment loans. Consumers are most likely to default on credit card debt than any other debt, therefore they have the worst APRs.