What Is an Installment Loan?

An installment loan is a closed-end credit account that allows you to access a lump sum of money and repay it according to a predetermined schedule at regular intervals. Mortgages, auto loans, and personal loans are well-known examples of installment loans. Many installment loans feature a fixed interest rate, ensuring that the rate remains constant throughout the life of the loan.

Installment loans can be either unsecured or secured loans. Secured loans necessitate collateral, such as real estate or a vehicle, to back the loan, while unsecured loans have no collateral requirement.

When repaying an installment loan, each payment is divided between the principal balance and interest. Typically, installment loans are fixed-rate loans, and the interest portion of your payments declines over time as the principal portion increases. Once you have paid the loan in full, the account is closed, marking the end of your obligation.

An installment loan’s structured approach to borrowing provides predictability and stability in your financial planning and offers a clear path to debt resolution.

Getting an installment loan follows a straightforward process: you select the product that fits your needs, verify your eligibility, apply, review the terms, and receive the funding.

1. Choose the right product

With a variety of loan options available, thorough research is crucial to find the loan that best suits your needs. For example, if you have multiple credit cards racking up interest charges, a debt consolidation loan may make more sense financially. Additionally, installment loans can be used to cover other large costs, such as home improvements.

2. Check qualifications and apply

Qualifications vary depending on the lender and the financial product. Many lenders will assess the following:

• Credit score: For unsecured installment loans, which do not require collateral, lenders often rely on your credit score and other indicators of financial responsibility to determine eligibility.
• Collateral: If you can secure an installment loan with collateral such as real estate or equipment, you may qualify for more favorable terms, including a lower interest rate. However, remember that if you default on the loan, the lender can sell the collateral to recover their losses.
• Personal income: Lenders need assurance that you can make timely loan payments, so they will typically consider your personal income when making their lending decision.

3. Understand the payment duration and repayment terms

You will repay an installment loan over a period of months or years, depending on the loan terms. Some lenders offer extended repayment periods, which can significantly reduce the monthly payment amount. Repayment terms vary by lender and will specify what actions are permissible during the repayment period.

For instance, some lenders allow early repayment without penalty, while others may impose an early repayment fee. It is crucial to fully understand the loan terms before committing to avoid any unexpected charges later.

4. Receive funding

Once approved for an installment loan, you will typically receive the funds in one lump sum. These funds are available for personal needs, providing flexibility in how you use them. Whether you’re looking to consolidate debt or cover a home improvement project, an installment loan offers quick and efficient access to the capital you need.

5. Begin installment payments

Repayment usually begins on a set monthly schedule. With fixed-rate loans, consistent payments make budgeting easier. Many borrowers automate payments to help avoid missing payments and, therefore, protect their credit profile.

Early in the term, when you have the highest principal balance, more of each payment goes to interest. But toward the end, most of each payment will go toward the lowered principal balance. Your lender’s amortization schedule will show how each payment will gradually reduce your loan balance.

Before committing to an installment loan, it is essential to understand both the advantages and disadvantages.

Installment loan benefits

• Predictable repayment schedule: Many installment loans feature a fixed interest rate, ensuring that your monthly payments and the total amount due over the loan’s duration are predetermined. This predictability simplifies debt management compared to revolving debt, where payment amounts can fluctuate
• Potential to improve credit score: Installment loan payments are typically reported to major credit bureaus. A consistent history of on-time payments can boost your credit score. However, verify whether the lender reports a positive payment history, as some may only report missed payments, which can negatively impact your score. Similarly, some lenders may not report positive or negative information to credit bureaus, which can protect privacy and prevent minor missed payments from negatively affecting credit scores.
• Access to large sums of money: Installment loans provide access to significant lump sums. For instance, qualified borrowers at BHG Financial can obtain up to $250,000,¹ offering substantial funding for various needs.

Installment loan drawbacks

• Commitment to a set term: While the fixed repayment schedule aids in budgeting, it also means you are committed to regular payments over several years. Any changes in your financial situation will not alter your obligation to repay the loan. Missing payments can adversely affect your credit score.
• Lack of flexibility: Unlike revolving credit, installment loans do not offer flexibility in terms of borrowing additional funds once the loan is approved. If unexpected expenses arise, you may need to seek additional financing.
• Potentially high fees: In addition to loan origination fees, some lenders impose other charges, such as prepayment penalties, if you attempt to repay the loan early. These fees can increase the overall cost of the loan.

An installment loan provides a lump sum with fixed payments and a defined payoff date. A line of credit allows borrowing up to a set limit with flexible repayment options. Plus, interest is charged only on the amount you use.

Lines of credit often have variable rates, which means payments can rise if market rates increase. Installment loans, particularly fixed-rate personal loans, offer greater payment stability because the rate will stay the same throughout the life of the loan.

Whether you choose a line of credit like a HELOC versus a personal loan depends on your objective. A defined, fixed-cost project or debt consolidation strategy may align better with installment financing. Ongoing need for capital may favor a line of credit.

BHG Financial offers highly specialized financing up to $250,000¹ for personal loans, which you can use to reach your personal and professional objectives. With repayment terms of up to 10 years,^1,2 you can use our installment loans to consolidate debt, complete a home renovation, and more. Our dedicated, U.S.-based concierge service is available around your schedule, meaning you can rely on our team to serve your needs every step of the way.