Difference Between Installment Loans and Personal Loans

difference between Installment and personal loans

When unexpected events show up, the first thing ever is to decide the borrowing option that is most sensible for you. The good news is that there are many types of loans available from which you can choose. However, locating the difference between different loans can present a significant challenge.

Different types of loans come with a varying set of repayment terms, interests, and fees, among other differences. What about personal loans and installment loans? Is there any notable difference between them? In this article, you will find all answers to understand the difference between personal loans and installment loans before borrowing.

What is the difference between personal loans and installment loans?

To clearly outline the differences between personal loans and installment loans, it is good to discuss them independently. Keep in mind that these two types of loans play a crucial role in helping you build your FICO credit score.

What is a personal loan?

At its core, a personal loan is a type of unsecured granted to qualifying borrowers who need additional money to fund real-time needs. Usually, you don’t have to attach any security or collateral while securing a personal loan. Also, your lender offers you flexibility so that you can spend your loan for whatever need.

Mostly, borrowers use personal loans to cover emergencies like unexpected medical bills, car repair, home renovation, or other expenses such as debt consolidation. Personal loans can be an excellent solution to finance wedding expenses or touring costs.

It is good to note that personal loans have a more straightforward and faster application and are mostly dispersed instantly. You can borrow a personal loan from a bank, credit card, or online lender. They are an appropriate option, especially when you want to pay off a chunk of debt and are paid back with interest over a reasonable duration. Typically, 24 months.

Note: There are single-repayment personal loans. If you borrow these types of loans, you will repay the lump sum with interest in a single batch.

What is an installment loan?

In a more straightforward definition, an installment loan means an amount borrowed that is repaid in equal increments over a fixed, mutually-agreed period of time. Installment loan usually involves borrowing a significantly higher amount of money upfront. Depending on your lender’s terms, you will have to pay a set amount on a monthly basis for a specific duration.

Installment loans can include any loan from mortgages and car loans to students’ loans and personal loans. This means that personal loans are a version of installment loans. The interests on installment loans vary with the type of loan, the principal balance, and the period of repayment.

Unlike with personal loans where you can use the amount borrowed to finance almost anything, installment loans are borrowed to fund a predetermined crisis. Additionally, installment loans are usually secured; therefore, you must provide security or collateral before getting the loan. At times, you may need a considerably higher FICO credit score to secure installment loans.

Can Personal loans and installment loans hurt your FICO credit score?

Building your credit score can send you in circles. Probably you attempted credit cards before turning to installments or personal loans. Even though these loans are ideal in building your credit score, they can hurt your FICO score.

Like in any other loan, timely repayment in personal and installment loans is showcasing financial responsibility. Therefore, if you fail to repay the set amount on time, you may end up affecting your credit score negatively.

When getting a loan, for this matter, personal loan or installment loan, you have to provide a steady income source to help repay the loan. Without justifying, you may have a challenge when borrowing from whichever lender. Even with a stable income, if you fail to repay your monthly installments timely, you will hurt your FICO credit score.

On the other hand, personal loans may put you into a huge debt if you can’t afford the repayments at the agreed time.

Between Installment loan and Personal loans, which works best?

Before getting deeper into this, every type of loan works best, depending on your situation. The good thing with personal loans and installment loans is that they help build your credit.

If you are starting or have a significantly low credit score, getting a small installment can be an ideal start off. This is because you can manage to pay the installments timely.

On the other hand, personal loans are an excellent choice if you want to consolidate your debt and attain a pretty manageable monthly low-interest repayment.

Both installment and personal loans can be beneficial in building your credit. However, this is if you are a responsible borrower and knowledgeable about your loans. To manage your loans better, make sure to pay attention to loan options and terms offered by different lenders.

How do Personal loans differ from other installment loans?

Basically, there are four common types of installment loans: personal loans, mortgages, auto loans, and student loans. Despite personal loans being under the umbrella of installment loans, it differs from the other types significantly.

Unlike other types of installment loans that are meant to fund a specific and unique need, personal loans have flexibility. The way you spend personal loans depends solely on your need, usually unforeseen occurrence. Other types will finance purported reasons, and the amount borrowed will be an equivalent of the car or house, but with interest and fee.

Mortgage loans are borrowed to buy a house, an auto loan is meant to buy a car, and student loan is for college tuition. The principle will vary depending on the value of what you want to purchase. Also, the interest rate and repayment time will differ from one lender to another.


It is apparent that you borrow loans depending on your needs. Personal loans are an excellent option whenever you want to finance emergencies, but it comes with considerably higher interest rates and fees. You can opt for other installment loans depending on your needs.

Andrew Norton

Andrew Norton is a Media and Journalism graduate (1st Class hons) and experienced freelance writer.

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