Many of the most common types of loans people take out are considered installment loans. Auto loans, mortgages, personal loans and student loans are all types of installment loans.
Auto loans are typically repaid in monthly installments over a range of 12 to 96 months, although not all lenders issue loans with terms within that range. Loans with longer terms often come with lower monthly payments, and higher interest rates, too. This means you’ll end up paying more overall to buy a car with an 84-month loan, even if your monthly payments are lower, than with a 36-month loan.
A mortgage is an installment loan used to borrow money to buy a house. Mortgages are typically repaid over 15-to-30-year terms with monthly payments. Some mortgages come with fixed interest rates that typically don’t change. This means the standard monthly principal and interest payments won’t change, either.
Personal loans are a type of installment loan you can use for a variety of purposes, like consolidating debt or paying off sudden expenses like medical bills. Personal loans typically have terms between 12 and 96 months. They usually have higher interest rates than other kinds of loans. This may be because personal loans don’t require collateral, like your car or house.
In most cases, installment loans will come with predictable payments. If you take out a fixed-interest-rate loan, the core components of your payment (outside of changes to loan add-ons, like insurance) will likely remain the same every month until you pay off your loan.
A predictable payment amount and schedule could make it easier to budget for your loan payment each month, helping you avoid missing any payments because of unexpected changes to the amount you owe. When shopping for an installment loan, make sure the monthly payments won’t stretch your budget. If they do, you might have trouble making your full payment when a financial emergency pops up. Installment loans also offer the comfort of knowing your debt can be paid off by a specified date. After you’re done paying the number of installments required by the loan, your debt should be paid off in full. If you get a loan with the shortest payment term you can reasonably afford, you can get out of debt faster and will probably pay less interest.
Unfortunately, installment loans can have their downsides. For instance, once you take out the loan, you can’t add to the amount you need to borrow, like you can with a credit card or line of credit. Instead, you’ll have to take out a new loan to borrow more money. When shopping for an installment loan, make sure you know exactly how much you need to borrow.
