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installment loans definition

Installment Loan Definition

Updated on March 29, 2019

 Loans

If you're not sure what an installment loan is, then you've come to the right place. We're about to explain as thoroughly as possible what an installment loan is, and what it might mean to you if you are considering the use of one of our loan services to get the cash you might need soon.

The Definition of an Installment Loan

In simple terms, an installment loan is any loan that is repaid over time with a set number of regularly scheduled payments. Car loans and mortgages are perfect examples of installment loans. You purchase a home with money borrowed from a bank. The agreement you sign with the bank lays out a schedule of payments until the loan is paid off, including interest. That is an installment loan.

But an installment loan definition might have a different meaning for different people. You see a lot of advertisements and sales pitches for installment loans which might have different ramifications for an individual depending on the type of installment loan they apply for. In other words, while the definition may be simple, not all personal installment loans are the same.

For instance; why do you see banks advertising different interest rate for houses than they do for auto loans? Would they lend their money at the same rate, regardless of what the loan is for? While the home loan may appear to have a lower interest rate, banks actually make a lot more money on home loans in part because of the nature of the loan and the length. Interest is applied differently for different types of loans (and this is not to mention fees and other costs).

A mortgage that is paid out over the course of 15 or 30 years will have a higher return than an auto loan that is paid out over a 5 or 6 year period, even with the higher interest rate on the auto loan.

Why Don’t Banks Just Charge What They Want Regarding Interest?

Competition.
While most large loans are backed by the Federal Reserve and follow the pattern of interest rates set by that institution, banks still compete for your business and try to get you to borrow from them by lowering their own rates as much as possible.

Of course, the best credit always gets the best interest rate. A house that is for sale at $200,000 will garner less revenue if the loan goes to a purchaser with better credit than someone who has worse credit, but is still able to afford payments on the loan.

Sometimes these competitive practices can get out of hand, which is why you may have heard of the term 'predatory lending'. CASH 1 believes in and encourages responsible borrowing. We also believe in responsible lending practices, which means you will never be pressured into taking a loan, even if you are just looking for information. It also means we will never loan you an amount you cannot pay back as demonstrated by your proof of income.

History of the Installment Loan

The concept of installment loans has a relatively short history and an interesting origin.

Before the year 1851, there were no practices of lending installment loans. You may have seen movies or read history books about people who had lines of credit at the local general store and would pay off those credit lines when they had available income. While it may seem to the contrary, this concept actually does not fit into the installment loan definition.

Typically throughout history, loans were made with the promise to repay them in full by a specific deadline. A merchant in ancient Greece who wished to purchase a new ship to haul vats of olive oil to destinations and customers throughout the Mediterranean region would borrow a lump sum, buy the boat (or hire shipbuilders to construct it) and repay the loan in full at the agreed-upon deadline, including interest (because while installment loans may be a historically recent concept, the concept of interest actually goes back several thousand years).

But the original idea of repaying a loan in installments over a set schedule comes from the Singer Sewing Machine Company which, in 1850, enacted a program where a customer could purchase one of their fine sewing machines through their installment loan program. Singer would lend the customer the money to buy the machine, and in turn, the customer would make regular payments on the loan until the debt was repaid, and get to take the sewing machine home immediately, rather than make upfront payment installments as fits the definition of what is commonly called 'layaway'.

The Singer Sewing Machine Company, based in Boston, soon found that it was making money not only on the sale of its sewing machines but on the interest of its installment loan program. In short order, furniture companies all over the Boston area began enacting their own installment loan programs to allow customers to purchase and take home furniture the same day the installment loan was approved, rather than deny a sale for lack of funds or rely on the aforementioned 'layaway' program.

The rest can be termed as 'financial history'. By 1924, 75% of all automobiles were being purchased through loan programs offered by the automobile manufacturer.