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What Is an Installment Loan?

Last updated Dec 4, 2023

If you’re in the market for a loan, you’re not the only one. In fact, household consumer debt has reached an all-time high at $17.29 trillion. Before you start applying for a loan, there are some factors you might want to consider, like which type suits your needs best. 

An installment loan is one type of loan option, but is it the right fit for you? We’ll break down everything you need to know about installment loans so you can make the best decision for your financial future.

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What is an installment loan?

First things first: what is an installment loan? Installment loans are closed-end debt, meaning you borrow a fixed amount from a lender and pay it off in installments as you go. Online installment loans are the same; the only difference is that the loan application and approval process happens virtually, adding an extra level of convenience. 

Types of Installment Loans

There are a few different types of installment loans, and they can either be secured or unsecured. A few common types are: 

  • Mortgages — A mortgage is taken out to buy a house and is secured by the house. The most common mortgages are repaid over a 15 to 30-year period. 
  • Auto loans — These can be used to buy a new or used car. They typically have a fixed interest rate and repayment periods, and they are secured by the car.
  • Personal loans — These cover a wide variety of expenses like debt consolidation, home improvements, and major purchases, like a big vacation or an engagement ring. They are typically unsecured.

How do installment loans work?

While there are secured and unsecured installment loans, we’ll only cover unsecured loans in this article. Once you’re approved for an unsecured installment loan, you’ll get a lump sum of money you agree to repay. You’ll receive a payment schedule based on the original amount borrowed and a fixed monthly payment for a fixed amount of time during which you will be paying principal and interest. Your fixed interest rate will be based on your credit score and other factors, so having an excellent credit score may help you get more favorable terms and rates. 

Once you reach the end of the fixed term (and have made all monthly payments), your loan will be paid off and the account will be closed.

Advantages of an Installment Loan

Installment loans are popular among consumers because they offer some level of financial flexibility. Additionally, they:

  • Allow you to pay for big purchases. They can provide quick access to the money you need for large purchases.
  • Can give you some financial predictability. Installment loans are structured so that you have predictable, regular payments, which can make budgeting easier. Make your payments on time and you’ll know exactly when you’ll be debt-free.
  • Can have lower interest rates than credit cards. Installment loans provide you with the money you need upfront — sometimes with lower interest than a credit line. They can also help you rebuild your credit health. Let’s say you just received a personal loan to consolidate your credit card debt. As you make on-time payments on the installment loan, your credit report will reflect that. Your payment history represents 35% of your credit score, so making on-time payments can have a positive impact on your score.

How does my credit score affect installment loan options?

A low credit score indicates that your risk of defaulting on a loan (failing to pay it) is relatively high. When you apply for a loan, your credit score is one factor used to determine the loan terms, fees, and interest rates you receive. Other key factors that impact a credit decision are debt-to-income ratio, income, and expenses. So, the higher your credit score, the better chance you have to receive good rates and terms.

For example, let’s say you apply for a $10,000 installment loan with a 580 credit score. One of the impacts of having a bad credit score is that a lender might offer you a $10K loan, but they may also charge you higher fees and a high APR, or annual percentage rate, to reflect your increased risk of defaulting or failing to repay the loan. When you consider how much even one percentage point makes on the interest you’ll pay on a $10,000 loan, you can see why it’s so important to strive for a high credit score.

How to Get an Online Personal Loan

A personal loan can be used to pay for a variety of expenses, whereas mortgages and auto loans have very specific purposes. Each loan has its own approval process, so we’ll just focus on the personal loan process here. 

While there are no guarantees that you’ll be approved for a personal loan you apply for, there are a few steps you can take to make the application process as smooth as possible. Getting an online personal loan means you don’t have to physically go into an institution to apply, so you’ll have as much time as you need to get everything in order before submitting your application. Here are a few things to consider before you apply for a loan online:

  • Check your credit report and score. Go into the loan approval process knowing what your score and report look like and it will help set your expectations.
  • Set your budget. Determine your budget and understand what monthly payments you can (and cannot) afford. 
  • Shop around. Look for providers that offer competitive rates. Depending on your unique needs, you can factor in the provider’s customer service ratings and speed of funding. You can also prequalify to check the rates you might receive. This isn’t a hard inquiry, so your credit score will not be impacted.

When you feel ready to apply:

  • Fill out the online application. Finish the application and submit it along with any requested documentation. Look for any written or emailed communication from the lender in case they need additional information to process your application.
  • Review the loan offer. If you’re approved, you will receive documentation detailing the terms of the loan. Evaluate the loan offer and determine if it fits your needs and budget. 
  • Receive your funds and set up payments. Once you select a provider and receive the lump sum, consider setting up autopay to avoid late payments and build your credit.

Can an installment loan help me build my credit score?

It’s possible! If you have a history of late payments, making on-time payments is one of the best ways to improve your credit score. Your credit score factors in your credit account payments, like how many on-time and late payments you made — and how long any late payments went unpaid. An installment loan can improve your credit score by building up a positive payment history. Just make sure to pay on time! 

Where do I get started?

You can apply for an online personal loan through Upgrade in as little as 5 minutes. Learn more about our personal loan options and start building your credit today.

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