Installment Loan Guide: Types, Costs, and Risks
Learn about the characteristics of an installment loan and how it differs from other forms of credit. Understand the factors you should consider before approval to make multiple payments.
Installment Loan Definition
An installment loan is a closed-end loan where the lump sum is advanced to the borrower and then repaid in a series of payments over a predetermined period. Each payment on an installment loan can include the principal amount, interest, and some other charges. Once the balance has been repaid, the loan account is closed rather than replenishing like a credit card account.
The Consumer Financial Protection Bureau characterizes a personal installment loan as the advance of money that is generally repaid in a series of set amounts over a defined period. The Bureau's personal installment loan definition further characterizes the credit terms as being a function of the applicant's credit, income, debt, the size of the loan, the term, state law, and a number of other factors.
Installment Loan Is a Repayment Category
The term "installment loan" does not refer to a specific financial product. There are many loans, including automobile loans, student loans, and personal loans, that can use an installment structure. Also, the purposes of the loan, the collateral, the risks involved, and the legal implications of the loan can vary.
At SlickCashLoan, our loan request service is geared towards personal loans. A lender may use an installment repayment schedule, but we do not issue loans or determine the conditions of the repayment. This guide is designed to educate borrowers on installment repayment and what it costs, as well as how to analyze that cost versus the other forms of credit that may be available.
Installment Loans, Revolving Credit, and Single-Payment Loans
| Credit Structure | How Funds Are Accessed | How Repayment Works | Important Consideration |
|---|---|---|---|
| Installment loan | An amount is specified and available at the outset. | Payments within a certain time period are made. | Just because payments are unsurprising does not mean a loan has a low APR or a low total cost. |
| Revolving credit | Loan balances can be repaid and have credit made available again (up to a specified amount). | The terms and the balance can affect the required payment. | Making just the minimum payment can lead to the loan having a much longer payoff period. |
| Single-payment loan | An amount is available, typically for a short period of time. | Both the principal amount and the charge amount are due at the same time on a specified date. | A large withdrawal can reduce the borrower's available funds and make the next pay period difficult, while repeated borrowing can add cost. |
Labels on loans are inconsistent. Assuming a payment schedule from a page title or advertisement means you won't get the information you need. Instead, review the total of payments, the amount financed, the APR, and the finance charge.
Payment Schedules and Amortization
Payment schedules determine the amount of each payment, how frequently payments are to be made, and the date when the final payment is to be made. While most payment schedules are made on a monthly basis, some payment schedules are made on a weekly, biweekly, or other basis. The payment schedule should be consistent with the borrower's cash flow.
With an amortizing loan, early payments often include more interest because the outstanding principal is larger. As the loan principal is reduced, more of a payment may be applied to the principal. The other factors that affect the payment and the principal include the contract terms, the method of interest, fees, the timing of payment, and whether the payment is returned.
Not all installment loans have a fixed rate, and some may allow a variable rate. Even when the rate is fixed, payments may vary depending upon the contract terms. Do not assume the label "installment loan" guarantees a fixed rate, identical payments, or a fixed contract term. For a more thorough discussion of installment payments and amortization, review the payment schedule explained.
What Determines the Full Cost?
The scheduled payment is only a part of the total cost. You should review the following prior to using installment loans:
- APR: The annual percentage rate (APR) is a yearly expression of the cost of credit and may help you compare offers with similar terms and dollar amounts.
- Finance charge: The finance charge is the dollar cost disclosed for the credit under the agreement.
- Fees: Processing, origination, late-payment, returned-payment, optional-product, or other charges may apply, depending on the lender and applicable law.
- Amount received: Cash delivered may be less than the face amount due to an upfront fee.
- Payment frequency: Cash flow may be strained even with smaller payments if there are more drafts.
- Term: A longer term can lower individual payments while increasing the total amount paid.
- Total of payments: The complete scheduled repayment provides essential context for the advertised payment.
The loan calculator uses price, rate, and term to give a general idea of the payment amount. The results generated by the calculator may not show all potential costs associated with a loan.
Why a Smaller Payment Can Cost More
More payments will extend the length of time that interest accrues, leading to a higher cost for the loan. Instead of looking to see which payment has the lowest amount, the borrower should consider which option has an affordable payment and the lower complete cost for the amount they need.
The borrower should also consider the length of time for the loan to be paid off and how it compares to the useful life of the item purchased. Repaying the loan long after the item purchased is no longer of value makes the loan difficult to justify.
Risks of High-Cost and Small-Dollar Installment Loans
Paying a balance in smaller payments will not make the loan affordable. Some small-dollar or short-term installment products can have high APRs or substantial fees. High-frequency withdrawal payments on these loans can also make it difficult for consumers to afford essential bills such as rent, utilities, food, and transportation.
Repeatedly refinancing or taking out a loan to pay off an installment can increase the amount paid and lengthen financial stress. If the payment as outlined does not leave room for basic needs and unforeseen costs, it is advisable to decline the offer and check out alternative options that do not involve a loan.
Credit Reporting and Missed Payments
A lender may report an installment account and payment activity to one or more consumer reporting agencies, but reporting practices vary. Opening an account, the amount owed, payment history, and missed payments may affect a credit profile. An installment loan does not guarantee that a credit score will improve.
Reach out to your lender before the payment deadline if you anticipate a payment will be made late. Available options depend on the agreement, lender policy, state law, and account history. A missed payment may lead to fees, collection activity, or negative credit reporting. Learn more about the consequences you can expect from a missed loan payment for a step-by-step guide on what to do next.
State Rules and Lender Terms Matter
State laws may affect licensing, loan amounts, rates, fees, terms, refinancing, payment plans, collection methods, and numerous other factors. Loans available in one state may not be available or may be highly restricted in other states. Verify if a lender is licensed where required and see what rules are currently in effect by visiting the website of the state regulator.
While federal disclosures help borrowers compare loan costs, they do not make every loan cost-effective. Be sure to read the agreement, retain a copy, and take note of every detail before authorizing electronic withdrawals.
Checklist Before Accepting an Installment Schedule
There are lots of factors to consider when deciding whether to accept an installment schedule.
- How much you actually receive, after you subtract costs, is important.
- Create a list with the actual payment amounts and due dates alongside the income you expect to receive.
- When evaluating different offers, look at APR, fees, term, finance charges, and total payment amount.
- Verify whether or not the rate and/or payment may change.
- Evaluate the terms for late payments or payments returned for any reason, and early payoff provisions. Also look at the terms related to the ability to refinance the loan.
- Confirm how automatic payments may be stopped without canceling the debt itself.
- Make sure that even with the payments you have planned, your needs are covered.
- Review various payment options, credit-union products, community assistance, and other lower-cost alternatives.
If you would like assistance on managing payments after borrowing, review the guide on managing an installment loan.
How Installment Loans Relate to SlickCashLoan
With respect to services offered by SlickCashLoan, the service focuses on personal loan options. While a personal loan offer may contain an installment loan repayment schedule, SlickCashLoan neither issues the loan nor determines the repayment terms associated with the loan.
Frequently Asked Questions
Is every installment loan a personal loan?
Not all installment loans are personal loans. Many personal loans are installment loans because the borrowed sum is advanced with a scheduled payment plan to pay back the loan over a defined period.
Are installment loans the same as payday loans?
Not always. Traditional payday loans are commonly designed to be paid back in one lump sum. However, some short-term loans do have multiple payments. Lending practices and regulations vary from state to state, so it's usually better to look at the contract.
Does a fixed payment mean the loan is affordable?
It does not. A payment that is fixed is still not necessarily affordable. Fixed payments can be affordable, or they can be extremely expensive. The total cost of the loan, the fees, the length of time that the loan is outstanding, and the other financial obligations that a person has are important factors. Another important factor is whether the person is able to pay for the necessities after covering the loan payment.
Can an installment loan be repaid early?
This depends on the agreement and the law. It is important to ask the lender for an official payoff amount and review any early-payoff conditions before sending additional money.
Will an installment loan build credit?
This cannot be guaranteed. Any effect depends partly on whether the lender reports the account, how payments are made, balances and inquiries, and the rest of the borrower's credit profile.