The question of what is an installment loan is an easier one to answer than you think. If you’re here, you may be thinking it’s a new type of loan you’ve never heard of.
The reality is that you have heard of an installment loan in other forms. If you’re 18 or older, you’ve probably already used at least one of them.
In the following article, we’ll give you a full rundown of what an installment loan is, how it works, and why you should (or shouldn’t) consider one. Let’s get started!
3 Types of Installment Loans
A quick definition of what’s an installment loan might go something like this. You borrow a lump sum of money upfront. You then pay that money back over time in equal or variable installments for the agreed-upon period of the loan. Here are the three primary forms.
Personal Loan
A personal loan can be taken out for any number of things. Some of the most popular forms include the following:
- Debt consolidation
- Home improvements
- Education
Websites like CaptainCash.ca have also noticed a trend among younger people or older adults whose credit is in arrears. That would be the practice of taking out a personal loan with a little higher interest rate to try and build or rebuild credit.
Auto Loans
These types of loans are extremely popular and come in two forms. One is a traditional loan through a bank, where the borrower pays for the entire car over a 5-7-year period. The other is one through the dealer that starts with a low interest rate for a period of three years with a balloon payment at the end.
The balloon payment can be hefty in these scenarios, leading the borrower to refinance a lesser amount over a longer period of time when the due date arrives. The advantage is not having to pay a hefty balloon payment, but the disadvantage is paying much more in interest and driving up the overall purchase price of the car.
Home Mortgages
Most installment loan information will point you toward home mortgages as the most popular form. That’s because homeownership is a tried and true investment trend among the general public.
It’s often the largest purchase one will ever make. It’s also one of the few physical assets you can buy where the value increases over time, provided you’re properly maintaining it.
The two most popular forms of the home mortgage are the 15-year and 30-year mortgage. In both scenarios, the buyer makes either 180 or 360 payments at a standard amount and takes full ownership of the house at the end of the loan.
What They All Share in Common
No installment loan FAQ would be complete without spending some time discussing the fixed vs. variable nature of each loan type. In any of the above scenarios, you can get a predictable payment through a fixed interest rate or see those payments go up and down through the variable.
The advantage of variable is that when interest rates go extremely low as they currently are, the payment can go down. The advantage with a fixed rate is that your payment is protected no matter how future interest rates may fluctuate (and remember that in October 1981, they hit an all-time high of 18.45 percent).
What Is an Installment Loan
We hope your question of what is an installment loan has been answered to your liking. More importantly, we hope you now have the info you need to make your next move. For more financial tips and information, check out some of our additional posts.
