Installment Loan

What Is an Installment Loan?

An installment loan is a type of loan where a borrower receives a fixed sum at the beginning of the loan term. The borrower repays the loan, including interest and any fees, in equal installments over time until the balance is repaid in full. Installment loans generally have fixed interest rates and payments, meaning the interest rate and payment amount remain the same for the entire length of the loan. Installment loans can range in size from several hundred dollars to several thousand dollars or more, and terms can range in length from a few months several years.

Common types of installment loans include home loans, car loans, student loans, and personal loans.

How Does an Installment Loan Work?

To get an installment loan, you’ll complete a loan application with the lender who will then perform a hard credit pull to review your credit history.

While qualifying criteria will vary, most lenders review your credit score and reports along with other factors to determine if you’re a responsible borrower who’s likely to repay your loan. For example, most lenders usually require a record of on-time payments, as well as a certain debt-to-income ratio and income to qualify.

If approved, your annual percentage rate (APR), monthly payment, and loan term length will usually remain fixed over the life of the loan. You’ll repay your loan until the balance reaches $0. If you want to repay your loan early, there’s usually no prepayment penalty. However, some lenders may charge a fee for early payoff or prepayment. It’s important to understand all the fees that may be associated with your loan.

What Are the Two Types of Installment Loans?

The two types of installment loans are secured and unsecured.

Secured installment loans require collateral, such as a home loan which uses your house as a guarantee for the loan. Unsecured loans don’t require collateral. Personal loans are a common type of unsecured installment loan, though personal loans can be offered as either unsecured or secured, depending on the lender.

Types of Installment Loans

Common types of installment loans include home loans, car loans, student loans, and personal loans. Installment loans may be secured—like mortgages and auto loans—or unsecured, like personal loans or debt consolidation loans.

Why Are Installment Loans Important?

Installment loans can make large purchases more affordable.

For instance, few people can afford to pay the total cost of a home in cash. A mortgage, a type of installment loan, allows them to pay for their house over time. Other major purchases and financial goals like cars, debt consolidation, and home improvements all can become more accessible through the availability of installment loans.

Do Installment Loans Impact Your Credit Score?

Installment loans could have a positive or negative impact on your credit score.

For example, an installment loan may improve your credit score if you make your monthly payments on time and in full. Your payment history accounts for 35% of your FICO score. This type of loan may also help improve your credit mix, which accounts for 10% of your FICO score.

But an installment loan may also harm your credit score. For example, when you apply for an installment loan, your lender will perform a hard credit check, which may cause your score to decrease by a few points, temporarily. And if you miss payments on your installment loan or pay late, your credit score may also decline.

Comparing rates on installment loans before you apply may or may not impact your credit score. It depends on whether a lender offers an option to prequalify for a loan with a soft credit inquiry, which won’t affect your credit score. The timeframe in which you’re comparing can also have an impact. For instance, with older FICO scoring models, multiple hard credit inquiries made within a 14-day timeframe are considered as a single inquiry. With newer FICO models, the rate shopping window has expanded to 45 days. [2]

How Do You Apply for an Installment Loan?

Depending on the lender, you may be able to apply for an installment loan online. If not, you can apply in person or using a paper application.

However, no matter how you apply, most installment loan applications will ask you to provide basic personal information, including your full legal name, address and Social Security number. You’ll also need to share information about your employment, income, and assets, such as bank account balances and possibly other financial statements.

How Long Does It Take to Get Approved for an Installment Loan?

The approval timeframe for installment loans may vary depending on the type of loan. For example, getting approved for a mortgage loan may take up to a month or longer, whereas getting approved for a personal loan online may only take days.

Can You Prequalify for an Installment Loan?

It may be possible to prequalify for an installment loan, however it all depends on the type of loan and lender you choose. Some lenders offer the option to prequalify with a soft credit check, while others do not.