What is an installment loan?

An installment loan lets you borrow a lump sum, then make a set number of monthly payments to repay the lender. Installment loans tend to have the same payment amount every month, making them easier to work into a budget. Mortgages, auto loans, student loans and personal loans are all types of installment loans.

How does an installment loan work?

With an installment loan, you borrow a specific amount of money, receive it all at once and then pay it back in regular payments, or installments, to the lender over the loan term. Many installment loans have fixed payment amounts — meaning the amount you owe back each month is the same over the life of the loan.

How to get an installment loan

To get an installment loan, you'll start by filling out an application with a lender (or a marketplace that offers access to multiple lenders). The application will likely ask you basic information about your identity, income and credit status.

Before you submit your application, read the fine print and any disclaimers so you understand whether the lender will perform a soft or hard pull on your credit. A soft credit pull gives the lender a snapshot of your credit, including existing accounts, and doesn't affect your score; a hard pull happens after you formally apply for credit. Hard pulls typically lower your score by a few points.

If the lender approves your application, it’ll offer details about your loan amount, interest rate, fees, monthly payment amounts and the length of the loan. If you like the terms, you can sign the paperwork (either in person or electronically) and receive your funds. You can also choose to keep shopping around to see if you can qualify for better terms with another lender.

Types of installment loans

Many of the loans you’re already familiar with — mortgages, auto loans, etc. — are common installment loans. Without the option to pay back in installments, these loan types wouldn’t be realistic for many borrowers.

Installment loans have terms that last from several months to many years, depending on the loan type.

Auto loans

Auto loans typically require monthly payments over a term ranging from 12 to 96 months. Choosing a longer term typically results in lower monthly payments, but you'll pay more in interest in the long run.

Auto loans tend to be secured, which means that the lender has a lien on the vehicle title until you pay off the loan.

Personal loans

Personal loans are unsecured, which means there's no collateral for the lender to repossess if you default on the loan. Borrowers use this type of installment loan to consolidate debt, fund home improvements, buy an appliance, pay for emergency expenses and for many other purposes. Because personal loans are typically unsecured, they tend to have higher interest rates than other types of installment loans. Personal loan terms tend to last from one to five years.

Mortgages

A mortgage is a home loan secured by the property. Mortgages usually have terms of 10, 15, 20 or 30 years, with an annual percentage rates (APRs) based on personal factors, like your income, credit history and down payment, and external factors, like market conditions.

Qualifying for a mortgage is a more extensive process than for a car loan or a personal loan. You’ll need to submit documentation to your lender, and the lender needs to order an appraisal. Closing on a mortgage loan usually takes from 30 to 60 days.

Student loans

Many student loans are federal loans backed by the U.S. government. Federal student loans have fixed rates and have several repayment plan options, including income-driven repayment plans.

You can also choose to apply for a private student loan through a bank, credit union or other lender. Private student loans typically have higher interest rates than federal student loans.

Student loan borrowers pay back their loans over time — 10 years is a standard term for both federal and private student loans, althrough consolidated loans may have a term between 10 and 30 years.

With a federal student loan, payments aren’t due until after you graduate, leave school or change enrollment status; some private student loans require installment payments to start while you’re still in school. In addition, some federal loans include subsidies to cover interest while you’re enrolled.

Pros and cons of installment loans

Installment loans provide a straightforward way to borrow money and pay it back over time. You can find an installment loan to use for nearly any objective, whether it’s making a large purchase, consolidating high-interest debt or dealing with a financial emergency.  However, there are risks to taking out a personal loan, like tying yourself to a long-term debt obligation.

Installment loans for bad credit

If you have bad credit (a FICO Score in the 500s or low- to mid-600s, for instance), getting approved for an installment loan can be difficult. While there are lenders that specialize in helping people with poor credit get installment loans for mortgages, cars and other significant purchases, they typically charge high interest rates and offer less favorable terms.

If you decide to proceed with an installment loan, be sure to make every payment on time. Your payment history is a large component of your credit score, so making all payments on time and in full is important for your credit history health.

Bottom line

Taking out an installment loan is a common way to borrow money to pay for a big expense. You get a lump sum of cash and pay it back in regular installments. Many installment loans have fixed interest rates with equal monthly payments, which makes budgeting and planning easier.

If you’re considering an installment loan, be sure to compare offers from a variety of lenders, including your local bank or credit union and online companies, to find a loan with the lowest cost. Make sure you understand all the terms of the loan, like the APR, the monthly payment, the number of payments, the late fee amount and whether there is a prepayment penalty.