What is an Installment Loan?

Installment loans are financing agreements that are structured to be paid back over time with minimum monthly payments. The loan term generally depends on the amount of money that is borrowed and can range from a few months (small personal loans) or up to 30 years (a mortgage).

An installment loan payment is constructed of 3 variables:

  1. Loan Amount
  2. Interest Rate
  3. The Length of the Loan

How Does a Personal Installment Loan Work?

So for an example let’s look at a $500 loan for personal use at an interest rate of 7% for a period of 6 months. Each month that you make a payment a portion of your repayment goes towards interest and a portion towards the principal. As you make more payments on your installment loan you will notice a larger portion of your payment will go towards your principal.

Loan Amortization ($500 Borrowed X 7% Interest for 6 Months) $85 Per Month Payments

Date Interest Principal Balance
Month 1 $3 $82 $418
Month 2 $2 $83 $335
Month 3 $2 $83 $252
Month 4 $1 $84 $169
Month 5 $1 $84 $85
Month 6 $0 $85 $0
Total Paid      

As you can see from the installment loan amortization table above it will cost you $10 in interest to borrow $500 for a 6 month term.

What are Examples of Installment Loans?

  • Personal Loans
  • Auto Loans
  • Mortgages
  • Business Loans
  • Are Installment Loans Only for People with Good Credit?

    While credit is a big factor in being approved for an installment loan it is not the only factor. Having good credit will definitely help you to obtain a lower interest rate but you will have to show that your budget will be able to absorb an additional payment.

    There are special online programs designed to help people with poor credit as well. These loans with monthly installment payments are a great way for people with subprime credit to begin rebuilding their credit history. Of course initially your rate of interest will be higher but as your credit rating improves so will your interest rates.

    Unlike other loans like payday loans, title loans or other short term loans an installment loan is generally a much better option. These financing agreements are stretched out over a specified time at a much better interest rate. Therefore, your monthly payments will be lower and more manageable.