Installment loans make it possible to borrow a lump sum of money, from hundreds to thousands of dollars, and repay it through a series of fixed payments (installments) over months or years. You typically have a set interest rate and repayment term, so you know exactly how much the loan will cost and when you can expect to pay it off.
These loans, which can be used to pay for a car, a home, and virtually anything else, are either secured or unsecured. If the loan is secured, it requires collateral (like a car) to back it. If it’s unsecured, you don’t need to use collateral, though it’s generally more difficult to qualify for unsecured loans.
There are multiple kinds of installment loans. Here are a few examples:
You can get an installment loan from online lenders, banks, and credit unions. If you’re a member of a bank or credit union, you may be able to qualify for lower rates or discounts.
The benefits of online lenders include convenient application processes and generally faster funding times. This can be great if an emergency hits and you need money within a few days.
Related: Learn more about getting a personal loan on Credible.com
When it comes time to apply for an installment loan, you’ll generally need the following to qualify:
If you decide an installment loan is the right fit for you, here are the steps to apply for one:
Related: Learn more about getting a personal loan on Credible.com
Payday loans are not the same as installment loans. Here’s how these two financial products differ (and why you should avoid payday loans if possible):
| Installment loans | Payday loans | |
|---|---|---|
| Interest rates | Interest rates vary by lender, but some lenders offer rates between 5.40% and 35.99%. | Payday loan rates can be as high as 400%, which makes them extremely risky. |
| Loan amount | Loan amounts vary by lender, but they typically range from several hundred dollars to hundreds of thousands of dollars (specifically for mortgages). | Because payday loans are designed to help bridge financial gaps between paydays, they’re usually $500 or less. |
| Payment due date | You generally make payments in monthly installments. | You must repay a payday loan in full by your next payday. |
| Repayment term | Repayment terms vary, but they can be between two years (for auto and personal loans) and 30 years (for mortgages). | Payday loans are very short-term loans (you generally have to repay them when you receive your next paycheck), and those repayment terms can be challenging to meet. |
Installment loans can have both positive and negative effects on your credit. If you make your payments on time, you’ll give your credit score a boost. On the other hand, if you miss payments, you can harm your credit score and risk having your debt sent to collections.
An installment loan can diversify your credit mix — the different accounts you have open — which makes up 10% of your FICO credit score. While this can have a positive effect on your credit, the hard credit check from your loan application can lower your credit score by a few points for one year.