Installment credit

What is installment credit?

Installment credit is a loan for a fixed amount of money. The borrower agrees to make a set number of monthly payments at a specific dollar amount. An installment credit loan can have a repayment period lasting from months to years until the loan is paid off.

Deeper definition

The most common types of installment loans are:

  • Mortgage loans — When you take out a mortgage, you finance the amount borrowed over a set number of years, normally 15 to 30. Once you have made all the payments, you own the house.
  • Student loans — With a student loan, you receive a specific amount of money to cover your educational costs. Once you graduate from school, you pay the lender back over a set period of time. One less-than-usual feature of student loans is that some loans allow you the option to defer your payments if you are unemployed.
  • Auto loans — Unless you have the money to pay cash for a vehicle, you will likely take out an auto loan. An auto loan is considered “secured” because the finance company knows that they can repossess the car if you fail to make payments.
  • Unsecured loans — If you have excellent credit, your bank or credit union may lend you money that can be repaid over time. People with less-than-stellar credit often borrow from payday loan companies that charge astronomical interest rates and tack on extra fees.

Considering getting an installment loan? Here’s how to get the best loan rates.

Installment credit example

Lenders need assurance that they will be repaid when they give you a loan. Here are a few of the things that they consider as they determine the risk involved of offering you a loan:

  • Your credit score and how well you have managed debt in the past.
  • Your annual income and how it fits into your debt-to-income ratio.
  • How long you have worked for your current employer or been in your current occupation.
  • Whether you have any additional sources of income.

 

Other Loans Terms

Add-on interest loan

Add-on interest loans have interest baked into the principal. Bankrate explains.

Hypothecation

Hypothecation is the act of securing a loan with collateral. Bankrate explains.

Voluntary lien

Voluntary lien is an important term to understand. Bankrate explains it.

Add-on interest

Add-on interest is calculated at the start of the loan. Bankrate explains.

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