How do installment loans affect my credit score?

Installment loans may help your credit score if you’re responsible and make on-time payments. If you don’t yet have an installment loan, adding one to your credit mix can show lenders your ability to handle various types of debt. However, adding a new loan can decrease the average length of your credit history and increase the amount you owe, overall (either can negatively impact your score). If you miss payments or make late payments on installment loans, your credit score can be negatively impacted as well.

What are the easiest installment loans to get approved for?

The easiest installment loans to get approved for are federal student loans and no-credit-check personal loans . These types of loans don’t require a credit check for approval, making them easier to access for all credit types. Federal loans have fixed interest rates, but no-credit-check personal loans may have higher interest rates and fees to compensate the lender for its increased risk.

Is a payday loan an installment loan?

A payday loan is not an installment loan. Payday loans offer quick cash at steep rates, and full repayment is generally due the next payday in one lump sum. While both payday and installment loans can provide funds, installment loans are generally much less risky.

What Is an Installment Loan?

Installment loans provide a sum of money upfront and are repaid in installments over the loan’s term.

By Melanie Lockert

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Written by

Melanie Lockert

Freelance writer, Credible

Melanie Lockert is a writer and author of “Dear Debt” with over 10 years of experience. Her work has been featured by CNN, Business Insider, U.S. News & World Report, USA TODAY Blueprint, and Yahoo Finance.

Edited by Meredith Mangan

Written by

Meredith Mangan

Senior editor, Fox Money

Meredith Mangan is a senior editor at Fox Money and expert on personal loans.

Updated October 22, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

Credible takeaways

There are various types of installment loans available, such as personal loans, home loans, and auto loans.
Secured loans tend to have very specific purposes, like buying a home or car.
Unsecured loans, like personal loans, are commonly used for a wide range of purposes, from funding a vacation to consolidating credit card debt.

An installment loan lets you finance a purchase over several months or years. Whether you get an auto loan, personal loan, mortgage, student loan, or another type, installment loans provide capital upfront that you can use as the loan permits. They’re convenient, accessible, predictable, and can enable you to buy what you need now if you don't have the cash on hand.

In this guide, learn about installment loans, how they work, and the different types available.

Installment loan definition

An installment loan is a type of lending product that provides you with money upfront in exchange for making payments in regular, scheduled installments over a set repayment period. Payments are determined based on the loan's interest rate, principal (the amount borrowed), and the repayment term.

How does an installment loan work?

When you take out an installment loan, you’re taking out a closed-end loan — meaning you can’t borrow more than the original amount and the loan has a set end date. You agree to repay the amount borrowed plus interest charged on that amount over the duration of the loan's term.

Payments

During the repayment period, you’ll make regular, scheduled payments (usually monthly) that include both interest and principal. At the end of the repayment period, the loan is paid off in full, assuming you’ve made timely payments. Many installment loans have fixed payments and a fixed interest rate (meaning neither will change during the loan's term). But some installment loans, such as adjustable rate mortgages (ARMs), have an interest rate that can change, meaning your payment can change.

Installment loan payments are typically amortized over the loan's term, which serves to equalize monthly payments. For instance, at the beginning of a loan, the bulk of your payments will go toward the interest you owe. However, as you pay down the principal, your monthly payment will remain unchanged (on a fixed-interest loan), but interest charges will decrease. This means more of your payment will go towards paying down the amount you borrowed.

Check Out: Average Personal Loan Rates

Loan purpose

Installment loans are available for a wide range of purposes, like buying a car, home, boat/RV, paying for emergencies, or paying off other debt. They can be secured by collateral (like a car, home, or RV) or unsecured. Unsecured loans tend to have higher annual percentage rates (APRs) than secured loans because there’s no collateral and the lender takes on more risk. With secured loans, you’re at risk of losing your collateral if you default.

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