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schedule 6 min read | April 9, 2021

4 Common Types of Installment Loans

Written by Daniel Azzoli

When you’re in a situation where you need to find a way to get your hands on a little extra money, a loan might be a useful option to keep in mind. But there’s a lot of work that needs to come before you actually submit an application.

One of those important steps is to understand what your potential options are. In the case of installment loans – which is what we’re going to be focusing on today – there are several types out there that all have their different characteristics and their different uses. So, it’s up to you to do your research and find what type of loan is best suited to your situation. But we’re here to help you with that!

Today, we’re going to break down this type of personal loan, go over some important details like how they may impact your credit history, and run through some of the most common types of installment loans to give you a better idea of what options you may have.

What is an Installment Loan?

In broad terms, with an installment loan, a financial institution like a bank, credit union, storefront lender, or online lender will lend you a specific amount of money in a lump sum, and you’ll then be required to pay that money back to them with interest and/or fees in scheduled, pre-determined payments. These loans typically have a longer repayment period than many other types of loans. The spread-out nature of your payments may make the process of paying your installment loan back easier than it would be if you had to pay it back within a shorter timeframe.

may calendar with green background

Generally speaking, the repayment period for an installment loan can span anywhere from a few months to a few decades depending on the type of loan you’re dealing with. Your payments will all usually be the same amount, so you’ll know how much you need to pay ahead of time. This can make it easier to incorporate these payments into your normal budget. They also may even be lined up with when you get your paycheck to make things more convenient.

Secured vs. Unsecured Installment Loans

One of the most important distinctions between different types of installment loans is whether they’re secured or unsecured. This largely determines what you need to qualify for either category of loan.

Secured installment loans are those that require collateral in order to get approved. Collateral is some sort of valuable asset that you pledge to a financial institution as a safety net in case you default on your loan. Under those circumstances, they may seize the asset you’ve provided.

Unsecured installment loans on the other hand, don’t require you to pledge any sort of collateral to get approved. Instead, more emphasis will generally be placed on your credit score in order to determine how reliable of a borrower you’ve been in the past. They’ll also likely take a look at things like your employment situation, your current income, how much debt you currently have, and more. There are even unsecured installment loans for bad credit, where your credit score won’t play as big of a factor in getting approved and financial institutions will instead focus more on those other factors we mentioned.

Another important difference to note between secured and unsecured installment loans is that because financial institutions have some sort of assurance that they’ll be reimbursed even if you default on a secured loan, the rates tend to be lower for these types of loans than they are with their unsecured counterparts.

4 Different Types of Installment Loans

With all of the potential options that may be available to you, you’ll need to find what works best for your situation. If you’re looking to buy a house or a car, a mortgage or an auto loan will likely be your best bet. If you’re facing an emergency expense without an emergency fund to help you handle it, and you don’t have the best credit history, installment loans for bad credit may be a viable option. They all have their intended uses, so it’s important that you learn about what distinguishes them from each other. So, let’s take a look at some of the more common types of installment loans to help kickstart your education!

1. Mortgages

If you’ve ever purchased property before, there’s a good chance you’re already familiar with what a mortgage is. They’re essentially installment loans that are meant to help you buy a home. When you buy a home, you’ll typically put forth a down payment to begin with, which will be a certain percentage of the overall amount you’re paying for the property. The financial institution offering the mortgage will then fill in the gap of what you haven’t paid, and you’ll then pay off your mortgage in installments. It’s also important to note that mortgages are secured installment loans where the collateral you’re pledging is the actual home you’re buying.

house keys in door

Because a mortgage is a high-dollar type of installment loan, your repayment period will be fairly lengthy. The most common term for a fixed-rate mortgage is either a 15- or 30-year repayment period.

A mortgage is a huge financial investment, so you’ll need to make sure you carefully assess your financial standing, including the state of your credit history, your employment, your income, and your long-term financial goals.

2. Auto Loans

An auto loan is another type of secured installment loan that is intended to help you make a specific purchase. In this case, that purchase is a vehicle and the collateral you’ll need to pledge is your equity in the car you’re buying.

You’ll typically pay off your loan in fixed installments, with the specific term varying depending on a number of different factors. While trends have shifted over the years, the average loan term for new car loans in the second quarter of 2020 was 72 months[1]. There may be some pros and cons to longer terms, so make sure to do your research and see what works best for you.

3. Student Loans

Student loans are specifically designed to help students fund their education, helping them pay for their tuition and other education-related costs. In many cases, they’ll be partially subsidized by the federal government and the interest rates for these loans is generally lower than you may find in certain other types of installment loans. On top of that, you’ll often only be required to start paying off your loan once you’ve graduated. In some cases, you may be able to defer your payments until you’ve secured employment.

student at college smiling holding books

If you’re looking for a student loan, you may want to start by getting in touch with the financial aid office of your school to help you find a suitable option for your situation. Just make sure you don’t borrow more than you need. Remember that the more money you borrow, the more you’ll need to repay in the end. It might be a good idea to start by looking for scholarships and grants – which you don’t need to pay back – before looking into student loans. You should also consider finding a job for the summer or a part-time job you can balance with school responsibilities during the year to help ease some of the financial burden of school.

4. Short-Term Personal Installment Loans

Short-term personal installment loans can be a useful option for anyone facing an emergency expense without an emergency fund to help them handle it. Like we mentioned earlier, the scheduled nature of your repayments can help you to incorporate these into your budget, and because they’re spread out over a longer period of time, they may be more manageable than if you’d have to pay back what you owe all at once.

You can look for installment loans online or through storefront lenders. If you need financial help as fast as possible, online installment loans may be a good option because of their relatively fast application process and the convenience of being able to apply from anywhere you get internet.

How do Installment Loans Affect my Credit Score?

As we’ve established, installment loans spread your loan payments out over a relatively long period of time. So, what does this have to do with your credit history? Well, your payment history and ability to make on-time payments is the highest weighted factor affecting your credit score. Because of this, making all of your installment loan payments on time may give you the opportunity to make an impact on your credit score. Meaning, you should consistently avoid making late payments or default on your loan.

Find the Installment Loan Option that Works for You

With all of the financial options out there, it can be tough to find what might be best suited to you. But as long as you’re thorough and you do your research, you can put yourself in a position to make an educated decision. We hope this article was able to help get you started on the right foot, and if you’re looking for more information on other financial products or some personal finance tips, check out our blog section to learn more!

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.


[1] https://www.creditkarma.com/auto/i/car-loan-term

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