What is an Installment Loan?
Reading time: 4 Minutes
September 27th, 2021
Let's be honest: Figuring out your personal finances isn't always the most exciting part of your day. In fact, learning everything you need to know about saving, investing and borrowing money can be downright confusing—sometimes even scary. To help make progress on your financial journey a little easier, here's a simple explanation for a common question you might have: What is an installment loan, and how does it work?
What is an installment loan?
The term installment loan may not sound familiar, but chances are you've used one at some point.
Simply put, an installment loan is any kind of loan where you borrow a set amount of money and repay the loan balance in regular installments. Those loan payments are usually due monthly, but in some special cases they could also be scheduled weekly, quarterly or even annually.
Installment loans differ from revolving debt, such as credit cards or a home equity line of credit. With revolving debt, you get access to a line of credit that you can use and repay over and over again as needed. With an installment loan, you decide how much you want to borrow up front, and then repay that amount (plus interest) once, over a set repayment schedule. If you need to borrow more money after you getting an installment loan, you'll have to apply for a new loan.
Types of installment loans
Now, you may wonder, “What is an installment loan used for?" There are several different kinds of installment loans, depending on how you plan to use the borrowed money. Here are some of the most common types.
- Auto loans. Auto loans usually have fixed interest rates, meaning your interest rate is set when you're approved for the loan and won't change during the loan's repayment term. Auto loans are secured by the car you buy, and the repayment period typically ranges from two to seven years.
- Personal loans. You can use a personal loan for just about any purpose, from consolidating debt to making home repairs. They can be secured or unsecured and typically have fixed interest rates. Personal loans often have repayment periods ranging from 24 to 60 months, although some lenders may offer shorter or longer loan terms.
- Mortgages. Mortgages are used to buy a house, a condo or other real estate. The property acts to secure the loan, meaning it could be repossessed if you fall behind on payments. Mortgages may have fixed or variable interest rates. They're usually repaid over a period of 15 or 30 years.
- Home equity loans. Home equity loans, also known as second mortgages, allow homeowners to access the equity they've built up in their property. They're secured by the property, usually have a fixed interest rate, and can have repayment periods ranging from five to 30 years, depending on your lender.
- Student loans. Student loans are unsecured loans that help pay for college. Unlike other installment loans, you typically don't have to start making payments until you graduate and find a job. All federal student loans have fixed interest rates, but private student loans may have variable rates.
How can I use an installment loan?
As seen above, you can use installment loans to buy a car, buy a house or pay for your education. But unsecured personal loans are installment loans you can use for virtually any purpose. Some reasons you might get an installment loan include:
- Consolidating high-interest debt
- Buying furniture or other large purchases
- Covering the costs of adoption
- Paying for unexpected home or car repairs, medical bills or other emergency expenses
- Covering high-cost elective medical procedures, such as braces or IVF or other fertility treatments
- Funding your dream wedding or vacation
Essentially, you can use a personal loan in any situation in which you need cash. And because a personal loan has a fixed repayment period and relatively low interest rates compared with a credit card, you may save more money with a personal loan than you would covering the same expense with a credit card.
How to get a personal loan
If you're interested in getting a personal loan, you'll need to apply with a lender. As part of your loan application, you'll be asked several questions about your financial situation and employment. In addition to collecting this financial information, the lender will also check your credit history and credit score to determine how likely you are to make your loan payments on time.
Taking steps to improve your credit score before applying can improve your chances of having your loan application approved. Paying down credit card balances and paying your existing debts on time can give your credit score a boost and help you qualify for a better rate.
Now you know what installment loans are, what you can use them for, and how to get one, take the next step by applying online for a Bank of Hawaii personal loan today.
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