What is An Installment Loan & How Installment Loans Work?

What is a Loan?

This is a kind of topic which most of the people feel unimportant to talk about or way more complicated to understand and tend to fall into the frauds or

Before going onto installment loans, we must know about the loan.

What is An Installment Loan & How Installment Loans Work?

Now, what is a loan? A loan is the lending of money, property, or an asset by one or many individuals. The principal amount that was borrowed is also to be repaid.

Well now there are many types of loans – debt consolidation loans, student loans, mortgages, auto loans, personal loans, home equity loans, cash advances, borrowing from friends and family, etc. but all of them primarily falls into two categories which are either a revolving line of credit or installment loan.

  • Introducing Installment Loans

An installment loan you borrow a specific amount of money from a moneylender, and you accept to pay back the loan with interest monthly or annually. This type of loan is useful for you to pay for studies, buying a home, or car.

Home equity loans used for maintenance or improvement or repairs of your house also comes under installment loans like a personal loan. While describing the rate for most of these loans remains fixed. That means the interest rate charged over the time of borrowing of the loan doesn’t change. It, therefore, helps the recipients to prepare for required payments in advance.

  • How to get an Installment Loan

To apply for an installment loan, one has to start from their local bank or credit union where they have savings accounts, where they can fill out an application with a lender, specifying the purpose of the loan. And if they are approved for an installment loan, you can qualify for discounts on the interest rate.

Now for determining the interest rate or if one qualifies for the installment loan, the lender will look at the annual income, the credit score, and the debt to income ratio so as to ensure the responsibility of a person to afford to borrow or to repay the loan.

As we know, now that credit score is one of the important parts of the loan application procedure, it is required to keep the credit score high.

  • How to save money on an Installment Loan?

You can save money on an Installment Loan by paying your installment amount before the date. However, there is another way you can save your interest by paying your full loan amount before the agreed time. You can save months or years of Interest money.

While other options can include on-time payment, which improves credit score and helps lowering credit utilization rate, or one can pay through credit cards or by settling the previous loans if applied and then heading towards a new loan.

  • Is Installment Loan the right choice?

Installment loans may not be the only right option, but it is one of the right options for the people, as it allows one to pay the actual amount they can afford monthly, which helps the borrower to know what to expect and can arrange the amount into the budget.

These loans are flexible and can be bent according to a borrower’s budget. One can choose longer repayments so as to lower monthly payment or can choose shorter the time period so as to lower the interest rate.

These loans do not require much documentation, which makes it less time-consuming.

  • Collateralized vs. Non – Collateralized

Collateralized debts, mainly known as secured debts, are those in which one has to pay a security for the payment of the loan. As soon as you pay all the installments of the loan, the security deposit will be returned to you. The borrower can use the asset to repay the funds he has advanced.

*Important: – the main difference between collateralized and non- collateralized debts is the presence or absence of the security deposit, i.e., anything used as security for not able to repay the loan borrowed.

Whereas Non-Collateralized debts are known as unsecured debts, which requires no security deposit. In this type of debt, if a borrower fails to pay the installment or the total amount, the lender can initiate the lawsuits to collect his payment. This type of loan is used because of the high-interest rate charged by the banks so the borrower prefers to borrow the money from a known person on the basis of trust and promise to repay.

Pros and Cons


1. Helps in building Credit Score

Timely and regular paying your installments easily builds up the credit score that helps you get loans with a greater amount.

2. Available for short and long terms

Installment Loans are available for longer as well as shorter periods according to your needs and your budget.

3. Monthly installments

Monthly installment doesn’t let you feel that you have taken a loan. It is burden-free and does not payload on the borrower.

4. Interest Rate is fixed.

Interest does not change over time and remains consistent; that is why one remains tension-free.


1. Often requires collateral

To take an installment loan, you may need to pay some amount of money as a security fee.

2. Quite rigid

Installment Loan is quite rigid in process with a fixed rate of interest. It is not flexible as compared to finance loans

3. Prepayment penalties

You may be charged with fine if you pay more amount than your installments before a specific period time

4. Requires qualification

Your application is only passed if you have some excellent qualifications, such as a government job, a good salary, etc.


Installment Loan is the right choice as it is available for short and long periods with a fixed amount of interest. It can save you a lot of money if you pay your installments regularly and timely. The best advice is to compare the rate of interest and period in various banks and refer to Government banks first rather than private banks.