Installment loan

What is an installment loan?

An installment loan is a financial product that permits individuals to borrow a large sum of money that they can then repay over time. The installment loan usually carries a fixed interest rate and requires regular monthly payments.

Deeper definition

Consumers favor installment loans for buying items that they cannot pay for in cash. Installment loans have clear terms laid out. When the borrower signs the contract for the loan, the contract clearly specifies the loan term, interest rate and possible penalties for missed or late payments.

Although installment loans permit early repayment, some do have prepayment penalties.

Collateral secures some types of installment loans, such as mortgages and auto loans. Since personal property can secure these loans, they tend to have lower interest rates than unsecured installment loans.

To qualify for an unsecured installment loan, prospective borrowers should have a solid credit history to receive the best terms. Even for well-qualified borrowers, the interest rate for unsecured installment loans is usually higher than secured installment loans. This is due to the lack of collateral.

Most installment loans have fixed interest rates for the life of the loan. One notable exception is an adjustable-rate mortgage. Adjustable-rate mortgages have a predetermined repayment period, but the interest rate varies based on the timing of a review of the rate, which is set for a specified period.

Installment loan example

An installment loan is popular with people who need to finance large purchases, such as property, appliances, boats and campers.

Car loans are a common type of installment loan. When you purchase your vehicle, you pay the balance off over a specific period of time at a stated interest rate.

Though the loan period varies depending on the loan, it is usually from three to seven years. Each month, part of the payment cover interest charges and part of it goes to principle. Once you pay off the loan, you own the vehicle. Should you default on the loan, the lender maintains the right to repossess the car.

Ready for a new set of wheels? Compare interest rates with Bankrate’s handy rate comparison tool!

Other Auto Terms

Service contract

Service contract is a term every savvy consumer should know. Bankrate explains it.

Capitalized cap cost

Capitalized cap cost is what you’ll pay to lease a car. Bankrate explains.

Dealer sticker price

Dealer sticker price is a term every consumer should understand. Bankrate explains it fully.

Dealer prep

Dealer prep is a term every car buyer should understand. Here’s what it means.

More From Bankrate