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.
Related: What Can't You Use a Personal Loan For?
Qualification
To qualify for any installment loan, you need to prove to a lender that you’re able to make payments on the loan. Typically, lenders consider your income, credit score, credit history, and current debt to make this assessment.
Check Out: What Credit Score Do You Need for a Personal Loan?
Note
Some installment loans, like personal loans, disburse funds directly to you, while others can send money directly to the seller of whatever you’re buying.
Installment loans vs. revolving credit
Installment loans differ from what’s referred to as a revolving loan or revolving credit. For example, credit cards are revolving and open-ended, allowing you to access a credit line, make payments, and continue to borrow for an indefinite amount of time. They commonly have variable interest rates, and a minimum payment that fluctuates depending on your current balance and the current rate.
Installment loans, on the other hand, provide a specific one-time loan amount upfront, typically have fixed payments and a fixed rate, and have a set end date for your payments.
Secured vs. unsecured installment loans
Installment loans come in two varieties — either secured or unsecured. Secured installment loans use an asset like a car, home, or even a savings account to “secure” the loan. This provides lenders a level of protection so that if you fail to make payments, they can take the asset to repay the loan.
Unsecured installment loans don’t require borrowers to put up any collateral to obtain the loan. As a result, they may have a higher APR or be harder to qualify for than a secured loan.
Securing a loan typically makes it easier to get approved and can help you qualify for a lower APR. Since the loan is backed by an asset, it’s not considered as risky to the lender.
Examples of installment loans
Here are some common examples of installment loans.
Personal loan
A personal loan is often an unsecured loan that can be used for a wide range of purposes. Some examples include debt consolidation, home repairs, medical bills, emergencies, and other large purchases.
Online lenders, banks, and credit unions offer personal loans of under $1,000 to $100,000 or more, depending on the lender and what you qualify for. Most personal loans don’t require collateral, and are repaid over two to seven years.
Learn More: How To Get Approved for a Personal Loan
Tip
Since there’s no collateral to appraise, you could get approved for a personal loan the same day you apply, and have the money within the next couple of business days (some lenders even offer same-day personal loans).
Personal loans are similar to credit cards in that they're both unsecured. However, personal loans are often more affordable than credit cards. According to the Federal Reserve, the average APR for a credit card was 21.59% in February 2024, while the average APR for a 24-month personal loan was 12.49%. Borrowers with excellent credit are most likely to qualify for the best rates.
Mortgage
A mortgage is a type of secured installment loan that uses your home as collateral. As such, rates on mortgages tend to be much lower than rates on unsecured installment loans. In the event you can no longer pay your mortgage, the home can be seized through foreclosure.
When you apply for a mortgage, you get funds upfront to cover the purchase of your home. As a borrower, you make regular payments for the duration of the repayment term, which is typically 15 or 30 years. Your mortgage payment depends on the type of mortgage you get.
- A fixed-rate mortgage has a fixed interest rate and a fixed monthly payment that stays the same over the life of the loan.
- An adjustable-rate mortgage (ARM) has a variable interest rate, which means your rate and monthly payment can fluctuate during the repayment term based on market conditions. ARMs often have lower initial rates than fixed-rate mortgages until they adjust and the rate (typically) increases. This could be within months, one year, or a few years.
Learn More: How Do Mortgages Work?
Student loan
A student loan provides money upfront to borrowers to cover educational costs such as tuition. You can get federal student loans through the U.S. Department of Education and take out private student loans from private student loan lenders.
Federal loans are fixed-rate loans. Private loans may be either fixed or variable-rate loans. For borrowers with variable-rate private student loans, the rate can change based on shifts in the market, which can affect the size of your loan payments.
As a borrower with fixed or variable-rate student loans, you make monthly payments to pay back the loan with interest until the end of your repayment term. Payments are predictable with fixed rates, whereas payments can fluctuate over time with variable rates.
Auto loan
An auto loan is how most people finance the purchase of a car. You can drive away with a car now and make monthly payments over your repayment term. Auto loans can come with fixed rates or variable rates, though fixed rates are more common.
Like a mortgage, auto loans are secured, but in this case by the car you used the loan to buy. If you default on your auto loan, the car can be repossessed.
Check Out: Auto Loan vs. Personal Loan
Where can I get an installment loan?
Where you get an installment loan depends on which type it is. Here’s a breakdown of installment loan types and where to find them.
Learn More: Where To Get a Personal Loan
Prequalify first
Before applying for an installment loan, see if you can prequalify or get pre-approved for certain types. For example, you may be able to prequalify for personal loans, auto loans, and private student loans with no impact to your credit score. However, once you formally apply for a loan, your credit score may dip slightly. Note that prequalification is not an offer of credit, and your final rate may differ from the estimate.
A credit check isn’t required for a Direct Subsidized or Unsubsidized student loan. However, if you plan to get a Direct PLUS student loan (for graduates, professional students, or parents), your credit may be checked, and an adverse credit history could disqualify you.
Mortgage lenders typically offer processes for both prequalification and pre-approval. However, the latter carries much more weight with sellers when you’re looking to buy a home.
Prequalification provides a rate estimate once you give the lender basic personal information, answer a few questions about your finances, and allow the lender to perform a soft credit check. Pre-approval requires that you complete a comprehensive application with a hard credit check, and results in an offer of credit that’s good for a certain period of time, such as 90 days.
Online installment loans for bad credit
If you have bad credit, it can be difficult to qualify for a loan, but it’s not necessarily impossible. For instance, secured loans may be easier to qualify for with bad credit; applying with a cosigner or with a co-borrower can help as well.
Check Out: Best Personal Loans With a Cosigner
Good to know
A cosigner is a friend or family member, ideally with good credit, who agrees to make payments on a loan if you can’t, but does not have access to loan funds. A co-borrower is also obligated to make loan payments, but does have access.
Credible rating
Fixed (APR)
7.80% - 35.99%
Loan Amounts
$1000 to $50000
Min. Credit Score
620
Credible rating
Fixed (APR)
8.49% - 35.99%
Loan Amounts
$1000 to $50000
Min. Credit Score
600
Credible rating
Fixed (APR)
9.95% - 35.99%
Loan Amounts
$2000 to $35000
Min. Credit Score
550
Credible rating
Fixed (APR)
11.69% - 35.99%
Loan Amounts
$1000 to $50000
Min. Credit Score
560
Credible rating
Fixed (APR)
18.00% - 35.99%
Loan Amounts
$1500 to $20000
Min. Credit Score
540
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
What is an installment loan FAQ
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.
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