Cash 1 Blog
Examples of Installment Loans: Find the Right Loan for You
Loans
What you should know:
- An installment loan is a debt that gives you funds all at once that are paid off in monthly amounts, called installments, over a set period.
- Personal loans, auto loans, mortgages and student loans are all examples of installment loans.
- An installment loan is a type of closed-end debt.
What is an Installment Loan?
Installment loans offer you the ability to borrow a set amount of money that you pay back in fixed monthly payments (usually at a fixed interest rate). The appeal is that installment loans are useful and adaptable personal finance tools. For example, you can take an installment loan to make a big purchase or consolidate multiple credit cards into one loan that you can pay off in small, manageable pieces. Whether you're financing a major purchase, consolidating debt, or funding your education, this guide will help you navigate the best installment loan options tailored to your circumstances.
Discover more: How To Get Installment Loans With Bad Credit
What Are Some Examples of Installment Loans?
Let's go through the most common types of installment loans and how these loans work.
Personal Loans
Personal loans are common because they provide borrowers with a lump sum amount to borrow and then the loan is paid back in fixed monthly payments over the term of the loan. Personal loans can be used for many reasons, from debt consolidation to dealing with an unexpected expense.
Auto Loans
Auto loans help you purchase a vehicle. They are secured loans that specifically use your car as collateral. Auto loans are typically repayable through regular fixed payments over one to seven years.
Mortgages
A mortgage is a large loan that is repayable over an extended period of 15 to 30 years, where the borrower's collateral is the real estate the mortgage pays to acquire. Repayment diminishes the principal borrowed plus interest, so it is paid off over the duration of the mortgage.
Student Loans
Student loans are loans designed to assist individuals with educational expenses. These loans typically have lower interest rates and more flexible repayment options compared to other types of loans. Repayment typically begins after a student graduates.
Buy Now, Pay Later Loans
Buy now, pay later loans (BNPL) are a type of short-term financing that allows consumers to purchase products immediately and pay for them over time, usually in equal installments. BNPL loans usually do not charge interest so long as the payments are completed within the terms agreed to, however late payments may incur fees.
Business Loans
A business loan is typically a loan to a company or entrepreneur to fund a business operation, expansion, or investment. Business loan terms vary, however the borrower must, in all cases, agree to repay principal and interest within a specified time by making regular payments normally referred to as installments. Occasionally, assets owned by the business serve as collateral for the loan.
Secured vs. Unsecured Installment Loans
Secured and unsecured loans offer their own set of advantages. They differ in approval requirements, level of risk, and overall cost. It’s important for you to decide the loan type based on your specific financial situation.
What Are Secured Installment Loans?
Secured installment loans are loans backed by collateral, such as a car, home or any other asset. The collateral reduces some of the risk to a lender and more often than not provides you a lower interest rate. Common secured loans include auto loans (vehicle is collateral) and mortgages (financing for property). Another way to secure a loan is through vehicle title loans, where the title of your vehicle serves as collateral. Secured loans generally allow for larger amounts and longer repayment terms, but if payments are missed you run the risk of losing your asset.
Discover more: Secured Loan Definition
What Are Unsecured Installment Loans?
Unsecured loans do not have a collateral requirement. Because of the increased risk to the lender, unsecured loans tend to have a higher interest rate. Common unsecured loans are personal loans (which can be used for a variety of expenses) and student loans. Credit card debt also counts as an unsecured loan product, where the monthly payment is spread out over time.
Discover more: Are Unsecured Personal Loans Right for You?
Key Difference Between Secured and Unsecured Installment Loans
Differentiating Factors | Secured Loans | Unsecured Loans |
|---|---|---|
| Collateral | These loans require collateral, such as a car, house, or other valuable assets. This asset is used by the lender as security if the borrower defaults on the loan. | These loans do not require any collateral. Lenders approve the loan based on the borrower’s creditworthiness, income, and financial history. |
| Interest Rates | Since secured loans are backed by collateral, lenders face less risk. This typically results in lower interest rates than unsecured loans, making them more affordable for borrowers. | Without collateral, lenders face higher risk, leading to higher interest rates. The borrower's creditworthiness may significantly influence the rate offered. |
| Loan Amounts | Lenders usually offer higher loan amounts for secured loans because the collateral reduces the risk of non-payment. The value of the collateral often determines the maximum loan amount. | These loans typically have lower borrowing limits compared to secured loans. The loan amount is determined by the borrower’s credit profile, income, and repayment ability. |
| Repayment Terms | These loans often come with longer repayment terms, ranging from a few years to several decades, as seen with mortgages and auto loans. Longer terms result in lower monthly payments. | Repayment terms are generally shorter, often ranging from one to seven years. Shorter terms lead to higher monthly payments but faster loan payoff. |
| Risk of Asset Loss | Borrowers face the risk of losing the asset if they fail to make timely payments. | Since no collateral is involved, there is no risk of losing your property unless the creditor obtains a court order. |
Final Word
When you want to cover a large expense, unexpected financial emergency, consolidate high-interest debt, or buy a car or home, an installment loan is a great option. Before applying for an installment loan, it’s important to understand the different types of installment loans and how they work. Comparing the best installment loans from different lenders is important to find a loan with terms that best match your financial situation.
