Key takeaways

  • There are several types of installment loans — both secured and unsecured — to choose from.
  • Secured installment loans are easier to access, but require collateral and are riskier for borrowers.
  • If you take out a secured installment loan and fall behind on the payments, you could lose your collateral.
  • Evaluate interest rates, fees and terms when deciding which installment loan is most ideal for your financial situation.

Installment loans can be either secured or unsecured. However, the loan type is dependent on a few factors, including the lender, the intended loan usage, your credit score and overall financial health.

Unsecured loans are based on credit score, while secured loans are backed by some form of collateral to mitigate the lender’s risk. While some offer both secured and unsecured loans, it’s typical for lenders to offer secured loans to those with less-than-stellar credit.

Are installment loans secured or unsecured

Installment loans are a handy tool when you need to cover a larger expense and want to have steady, fixed payments to budget around. The loan proceeds are dispersed in a lump sum and repaid in fixed, monthly payments.

These loans can be secured or unsecured. Secured loans require collateral that can be seized by the lender if you default. However, unsecured loans do not come with collateral requirements. So, your assets aren’t at risk if you’re unable to make timely loan payments.

Types of installment loans

There are a few main types of installment loans available to consumers:

  • Personal loans are generally unsecured, and you can borrow anywhere from $1,000 to $100,000 from a variety of lenders. You’ll typically find that there are options to fit every budget and credit profile.
  • Auto loans are secured by the vehicle you purchase. You can borrow directly from a lender or opt for dealership financing. Either way, you may see lower rates than a personal loan — but be prepared for more restrictions on how much you are able to borrow.
  • Mortgages are secured by your property or home. You can borrow a significant amount with a mortgage at low rates, and most lenders offer 30 years to pay back what you borrow and build equity in your home.
  • Home equity loans are secured by the equity you build in your home. Because of this, they have lower rates than other installment loans and you can generally borrow more.
  • Student loans with fixed interest rates are unsecured and designed to cover college or university expenses. Most allow you to postpone payments until after you graduate or make interest-only payments while you are in school.

Secured vs. unsecured installment loans

There are some key differences between secured and unsecured installment loans to be aware of. Secured installment loans — like mortgages and auto loans — use the property you purchase with the loan as collateral. However, unsecured installment loans — like personal loans and student loans — only use factors like your credit score, debt load and income to determine your eligibility.

You could qualify for higher loan amounts with a secured loan, depending on the value of your asset. Secured installment loans also often come with lower average rates, although the rates you receive will depend on your credit profile, income and other debts. But with unsecured installment loans, rates tend to be higher since the lender assumes more risk.

It’s also vital to consider the level of risk with both options. You have far more to lose with a secured installment loan than an unsecured installment loan. Defaulting on either means your credit score could take a hit. That said, the damage is even more sizable with a secured installment loan if you lose your asset.

Types of installment loans to avoid

Unfortunately, “installment loan” is a broad term with a variety of definitions. Most installment loans are personal loans with interest rates under 36 percent. But depending on your state, you may also come across installment loans that charge interest over 100 percent.

These function more like extended payday loans. You will have a few months to pay back a small amount of money, and interest — or fees — will add up quickly. Avoid these if possible. Predatory loans like short-term installment loans can put you in a cycle of expensive debt that can be difficult to break.

What to look for in installment loans

While you should be aware of the lender’s customer service and reviews, interest rates, loan terms and fees will be the bigger factors when determining if an installment loan is worthwhile.

  • Interest rates. Interest rates vary widely between installment loans, but for any loan, rates will cap at 36 percent. If you have good to excellent credit, you may be able to get an installment loan with a lower interest rate, although it will also depend on your income and other debt.
  • Fees. Lenders often charge late fees if you miss a payment, but you should also look for origination fees and prepayment penalties. An origination fee is essentially the cost to borrow the loan. A prepayment penalty is a fee for making an early payment, and is not common.
  • Loan terms. Personal loans may have terms as short as one year while mortgages and home equity loans can last 30 years. The loan term your lender offers on an installment loan should fit your budget. Remember: the longer the loan term, the more you will pay in interest.

Bottom line

Installment loans can be secured or unsecured, which make them a versatile option to cover your expenses. Consider your unique needs, personal preferences and financial profile to decide which option is more ideal. Once you determine the type of installment loan you need, compare lenders to find the interest rates and terms that suit your budget and best meet your needs.