What Are Some Examples of Installment Loans?

Installment loans are the most common type of loan product available to consumers. Mortgage loans, auto loans, student loans and personal loans all fall under the installment-loan umbrella. The first three types of installment loans are self-explanatory, but personal loans can be used for a variety of purposes, including to consolidate debt, cover an emergency expense, or finance a large purchase.

 

How Are Installment Loans Different From Credit Cards?

Both installment loans and credit cards allow you to borrow money that you will eventually repay. However, they differ in terms of how the loan is repaid. With an installment loan, you repay the amount you borrowed in regular installments until the entire debt is paid off. With a credit card, you can spend the money you borrowed (up to a particular credit limit), repay it and then borrow again on a revolving basis. For this reason, credit cards are considered “revolving credit,” while installment loans are considered “closed-end credit.”

 

How Are Installment Loans Different From Payday Loans?

A payday loan (also known as a payday advance) is a small, short-term loan intended to cover unexpected expenses that can’t wait until you receive your next paycheck. Payday lenders typically charge a fixed fee based on the amount of money borrowed, and you have until your next payday to pay off that amount plus the fee.

There are a few key differences between payday loans and personal installment loans. For one thing, installment loans are repaid over time through fixed bi-weekly, monthly, or semi-monthly payments, while payday loans are repaid all at once, usually within a few weeks of receiving the cash.

Because a lump sum is due relatively quickly, many borrowers find it difficult to repay a payday loan on time. According to the Consumer Financial Protection Bureau, 80% of payday loans are rolled over or reborrowed within 30 days.

“The biggest problem with payday loans is that you can’t pay them off gradually, like a mortgage or a car loan,” says Amy Livinston at Money Crashers. “You have to come up with the whole sum, interest and principal, in just two weeks. For most borrowers, a lump sum this size is more than their budget can possibly handle — so they just renew their loans or take out new ones.” Since most payday lenders charge renewal fees and bounced check charges, this can create a cycle of debt that’s tough to escape.

 

Installment Loans vs. Payday Loans At-a-Glance

 

Installment Loans

Payday Loans

Cost

A fixed interest rate based on your credit score and other financial info; typically lower APR than a payday loan.

Flat fee based on the amount of money borrowed; typically higher APR than an installment loan

Amount

Ranges from a few hundred to several thousand dollars

Usually less than $1,000

Repayment Terms

Fixed payment schedule until the loan is repaid in full

Your next payday

Payments

Bi-weekly, monthly, or semi-monthly fixed payments

One lump sum


How Do Installment Loans Affect Your Credit Score?

Much like credit cards, installment loans can impact your credit if the lender you’ve chosen reports payments to a major credit bureau such as Experian™, TransUnion®, or Equifax®.  If you pay your bill in full and on time each month, it will positively affect your credit score. If you miss payments or pay your bill late, especially by more than 30 days, it will likely cause your score to drop.

If you’re looking for ways to build your credit, a traditional installment loan isn’t usually recommended. However, you may want to consider a type of installment loan called a credit-builder loan. Credit-builder loans are similar to secured credit cards in that they’re specifically designed to help you build, rebuild or improve your credit. With a credit-builder loan, you provide the loan amount to the lender as collateral, then pay it back in installments over time. Once the loan is paid off, you’ll get the deposit amount back, plus interest. And if you made all your payments consistently and on time, you’ll end up with a better credit score.

 

What Are the Pros and Cons of Online Installment Loans?

People often turn to installment loans because they’re relatively easy to obtain in comparison to other types of loans, and you can get the loan amount quickly, sometimes within minutes. However, just like any other credit product, installment loans have their advantages and disadvantages. Whether or not an installment loan is right for you depends on your financial situation and specific needs. Below are the top pros and cons of installment loans.


How Do You Get an Installment Loan?

Pros

Cons

Great for large purchases, emergencies, or consolidating debt

Potentially high interest rates and fees

Flexible repayment terms allow you to pay off the loan in manageable installments

You could get locked in to a long-term commitment you can’t afford

Fixed payments until the loan is repaid in full.

Missing or late payments can damage your credit

Potential to save on interest charges if you pay the loan off early

Some lenders may charge a prepayment penalty fee

 

First, the basics. To apply for an installment loan, you’ll need:

  • Government-issued ID
  • Proof of income
  • SSN (Social Security number)
  • Some lenders may also require a checking account

When shopping for an installment loan, it always pays to do your research. Rates and terms vary widely, so make sure to compare APRs across multiple lenders before making a decision. You’ll also want to choose a loan with repayment terms that will work for you over the life of the loan.

If you prequalify for a loan, it simply means the lender has determined that you have a good chance of being approved. Prequalification gives you the opportunity to review your potential loan amount, terms, and repayment schedule without being subject to a credit check. That means that even if you apply for a prequalified loan and get turned down (or decide you don’t want it), your credit score will not be affected.  For this reason, there’s no harm in getting prequalified by multiple lenders. Your credit score will remain untouched while you compare all your options.

 

What Are Some Installment Loan Alternatives?

If you’re unable to get an installment loan, only qualify for ones with less-than-ideal terms or simply want to avoid loans from traditional banks, here are some other loan options to explore.

  • Peer-to peer loan. A peer-to-peer loan — also known as P2P or social lending — allows you to borrow money from an individual investor or group of investors without going through a financial institution. P2P loans can be a good option if you’re looking for a way to pay off debt with a lower interest rate than other types of loans typically provide. However, the tradeoff is often an origination fee that can equal 1%-8% of your total loan amount.
  • Home equity loan. Home equity loans allow you to borrow money against the value of your house. If you have equity in your home, are looking for a lower interest rate, and are confident in your ability to repay the loan, this type of loan can be a good option.
  • Personal line of credit. A personal line of credit is a type of revolving credit. Similar to credit cards, personal lines of credit allow you to borrow (and repay) only the amount that you need. They're often used for long-term projects that have variable costs, which makes them a good option for projects without a specified price tag or end date.
  • HELOC. A HELOC, or home equity line of credit, works like a personal line of credit but is designed for people who own a home and have equity to borrow against.
  • Salary advance. Some employers allow you to access some or all of your next paycheck ahead of your usual pay date. You won’t be charged any fees or interest for a salary advance, but you may be required to disclose personal details to your employer. In addition, some employers will only allow advances for specific qualifying expenses.
  • Borrowing from friends and relatives. This is an option if you have a friend or family member who’s willing to lend you the money you need. However, this type of “loan” can have just as many disadvantages as a loan from a financial institution — they’re just more likely to be personal ones. When borrowing money from a friend or relative, it’s still a good idea to put the terms of the loan into writing and stick to them.

Remember that all the alternatives to installment loans listed above come with their own set of pros and cons, and some require good credit for approval. Whatever type of loan you’re considering, be sure to research it thoroughly and read the fine print. If the terms of the loan aren’t a good fit, the interest rate is too high, the fees are exorbitant or you have good reason to think you may default on the loan, it’s a good idea to keep looking until you find a more suitable option.

At RISE, we believe everyone should have access to loans that meet their needs and support financial wellness.  With a loan from RISEcredit.com, you borrow what you need, when you need it. And RISE provides free access to your credit score, helping you take control of your debt. Apply for an online installment loan today at RISEcredit.com.

Next related article

What are the different types of cash loans? Learn the differences between online loans, payday loans and credit card cash advances.

Cash Loans Defined: 3 Types of Loans for Quick Cash

March 31, 2017

What are the different types of cash loans? Learn the differences between online loans, payday loans and credit card cash advances.