Installment Loan Definition & Meaning
Installment loan summary:
You receive an installment loan as a single lump sum.
You then repay that installment loan over a series of scheduled payments.
The interest rate and loan term help determine how much you’ll pay for an installment loan.
What is an installment loan?
An installment loan is a type of loan received in a single lump sum and repaid over time through a set number of scheduled payments. Each payment is an installment. Installment loans are commonly used for big-ticket items like homes, cars, boats, or other large purchases.
Key concept: An installment loan is distributed as a lump sum and repaid through equal monthly payments.
More about installment loans
Installment loans make it possible for everyday consumers to purchase large items they may not otherwise have the money to buy. For example, most of us get an installment loan to buy a home. Rather than come up with hundreds of thousands of dollars in cash, buyers can borrow the money from a mortgage lender and repay it by making monthly payments. An installment loan can also be used to consolidate debt, such as that held on credit cards.
Installment loans: a comprehensive breakdown
When you’re considering an installment loan, it’s important to understand how much it will cost. These two factors play a role:
Interest rate. The interest rate may be fixed or variable, depending on the loan. As the names suggest, a fixed-rate loan has an interest rate that remains fixed in place. It stays the same throughout the life of the loan. A variable-rate loan has an interest rate that can vary. The rate could go up or down while you have the loan.
Loan term. A term is the length of time you have to repay the loan. For example, a 5-year personal loan is repaid over five years. A 20-year home equity loan is repaid over 20 years.
Before signing your name to a loan agreement, it’s smart to look closely at the interest rate and term. You can use online calculators to find out how much interest you’ll pay if you’re looking at a fixed-rate loan. It’s not possible to predict the total interest you’ll pay on a variable-rate loan.
Installment Loan FAQs
A $5,000 personal loan repaid over three years at a 12% APR runs roughly $166 a month. Your payment may be higher or lower depending on your specific rate and the term length, though. A lower rate or a longer term makes the monthly payment smaller, and a shorter term or higher rate makes it larger.
Make sure to consider the total cost of the loan, not just the monthly payment, when comparing options. Loans with longer terms and lower monthly payments could cost you more in interest fees overall—and vice versa.
You could save money on interest and pay off your loan early by making extra payments. Once the loan is repaid, it remains on your credit report for 10 years. Check to make sure your loan doesn't have prepayment penalties that reduce the amount you save.
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Learn how installment loans work, how to get an installment loan, and what lenders check before they approve your application and set your rate.
Having something valuable to borrow against could help you qualify for a loan. But some types of debt should be avoided even if you qualify. Learn more
Learn how installment loans work, how to get an installment loan, and what lenders check before they approve your application and set your rate.
Having something valuable to borrow against could help you qualify for a loan. But some types of debt should be avoided even if you qualify. Learn more