How Do Installment Loans Work?
An installment loan has three main components: principal amount, interest rate, and loan term. The lump-sum amount you borrow from the lender is called principal, and the interest rate is a percentage of your principal that you are charged for borrowing money. The loan term is the total number of months you've chosen to repay the loan.
These three components help in deciding your scheduled monthly installment amount. You can either use online calculators to know the value of your equal monthly payments or calculate it yourself.
Monthly Payment For Installment Loan = (Total principal of the loan + Total interest on the principal)/
Total number of payments during the loan tenure.
For example, let us assume you take out an installment loan for $2,000 at an interest rate of 36% to be paid back over 12 months. Since an installment loan is paid back in monthly installments of an equal amount, you will be making the payments in 12 monthly installments.
Typical 12 Month Example:
$2,000 installment loan assumes a 12 month term with monthly payments.
Rates are calculated using the simple interest method. APR calculation is based on monthly payments, with your first payment being 30 days from the effective loan date.
||Total Interest Paid
As you can see from the above calculations, you would make 12 monthly payments of $226.66 each to pay back the installment loan.
Now that you know how most installment loans work by offering you the benefit of fixed monthly payments, it's time to learn about the wide range of installment loans based on the usage of collateral and further the purpose of your loan.