What installment loans are and how to get one

An installment loan provides you with a lump sum of money upfront that you then repay through a series of payments, or installments, over a set term. For example, mortgages, auto loans, and personal loans are all types of installment loans.

Along with requiring you to repay the principal, installment loan lenders charge you to borrow money according to an annual percentage rate (APR). Fees that can increase your borrowing costs include origination fees, documentation fees, and, in the case of mortgages, additional closing costs, such as the appraisal, attorneys fees, and discount points.

Compare installment loan rates

How do installment loans work?

If a lender approves your installment loan application, you'll receive the loan amount as a lump sum, which may be sent straight to you - often via direct deposit to your bank account - or delivered to another party, such as a home seller or auto dealer. Or, in the case of debt consolidation, the lender may send funds directly to your creditors - and may even offer a rate discount for it.

Once the funds are disbursed, your repayment schedule will begin. The amount you borrow, plus interest, will be split up into payments over a set term. If the loan has a fixed interest rate, your payment should not change. Whereas, if it has a variable interest rate, your payment can change in relation to current interest rates set by the market.

The length of repayment varies depending on the type of loan you get and the lender. But generally, the following repayment terms are available:

• Car loan: 2 to 7 years
• Home loan: 15 to 30 years
• Personal loan: 2 to 7 years
• Home equity loan: 5 ot 30 years

Interest and payments

Lenders determine what interest rate you qualify for based on factors like your credit profile, income, current debt, and the details of your loan request. However, some installment loans tend to have lower interest rates than others. For example, the average interest rate on a two-year personal loan was 12.49% in February 2023, while the average rate on a five-year car loan was 8.22%. In general, good to excellent credit and a strong income are crucial to landing a lower rate.

Interest is calculated monthly as you pay off the loan, so the principal amount (what you owe) decreases each month, meaning the amount of interest you pay each month decreases as well. In turn, the amount you pay toward the principal increases each month.

For example, let’s say you take out a five-year, $10,000 personal loan with a 14.75% fixed interest rate. In this case, the loan would cost $4,195 in interest overall, resulting in a total repayment amount of $14,195 and 60 monthly payments of about $237.

Types of installment loans

The two main types of installment loans are secured and unsecured loans. The main difference between the two is that secured loans require you to pledge collateral, such as a home or vehicle, while unsecured loans don't. Here are some of the common types of secured and unsecured installment loans you can find on the market.

Secured installment loan examples

• Mortgages: Secured by the home financed.
• Auto loans: Secured by the vehicle financed.
• Equipment loans: Secured by the equipment financed.
• Secured personal loans: Used to finance personal purchases and secured by one or more of the borrower's assets. (Though secured personal loans are offered by some lenders, unsecured personal loans are more common.)

Collateral has a few effects on installment loans. If you end up defaulting on a secured loan, the lender can seize and sell your collateral (like your car or home) to help recover the amount you owe. As a result, secured loans present less risk for lenders, are typically easier to get, and may have lower rates relative to similar loans that are unsecured.

Unsecured installment loan examples

• Personal loans: Issued to individuals for personal expenses, such as weddings, debt consolidation, and home improvements.
• Business loans: Issued to individuals for business purposes.

If you default on an unsecured loan, the lender has to take you to court and get a judgment before it can seize any of your assets. In the case of collateral vs. no collateral, you really want to make sure you can pay on-time and in-full on either. Defaulting on a loan can have a severe negative impact on your credit score.

Where can I get an installment loan?

Installment loans are available from a wide range of financial institutions, including banks, credit unions, and online lenders. However, the types of loans available from each lender can vary. For example, a bank may offer home and auto loans while an online lender may specialize in personal loans. The first step in finding the best lender for your situation is to identify the type of installment loan you want. From there, you can research the best lenders for that particular loan type.

Requirements for an installment loan

If you want to get an installment loan, lenders require you to meet a variety of eligibility requirements. For example, they often consider your:

• Credit reports: Lenders often review your credit reports to see your payment history, amounts owed, credit utilization ratio, hard credit inquiries, public records, and credit history length. They may have restrictions on the different report categories, such as not allowing more than two missed payments over the past seven years.
• Credit scores: A certain minimum credit score may be required.
• Income: You may need to make a minimum amount per month or year.
• Debt-to-income ratio (DTI): This is the amount of your monthly income - before taxes - that goes toward debt payments. You often need a DTI under a certain limit, such as 36% for personal loans and 41% for mortgages.
• Employment history: Your history of employment may also be reviewed to assess the stability of your income.
• Proof of identity: A government-issued ID will be required to prove your identity and legal presence in the U.S.
• Proof of address: You may need to provide proof of your address and residential history for the past two years.
• Collateral (for secured loans): If the loan is secured, the lender will need to assess the value of your collateral.

While the above requirements are common with installment loans, they'll vary depending on the loan type you want and the lender you choose. For example, here are the personal loan requirements for Discover:

• Citizenship/residency: You must be a U.S. citizen or permanent resident with government-issued identification.
• Legal age: You must be at least 18 years old.
• Annual income: You must have a household income of at least $25,000 per year.
• Physical address: You must have a verifiable physical address.
• Email address: You must have an active email address that you can access.
• Credit score: You must have a credit score of at least 660.

Additionally, Discover runs a hard credit check to assess your credit history, activities, and inquiries which will temporarily lower your credit score.

Can you get an installment loan with bad or no credit?

You may be able to get an installment loan with bad or no credit, but will need to apply with lenders that offer loans for bad credit. Look for those that cater to borrowers with less-than-perfect or no credit (a FICO score below 580).

You may also have better luck with secured loans, as the collateral lowers the risk for lenders. Or consider enlisting a cosigner. Though not all lenders allow them, a cosigner agrees to make payments if you don't, lessening the risk for the lender, but putting your cosigner's credit at risk - along with yours - if you default.

Personal loans for bad credit

How to apply for an installment loan

1. Check your credit: Make sure your credit is in tip-top shape so you can land the best rates and terms on your loan. You can get free annual online reports from AnnualCreditReport.com.
2. Review your income: Look over your income statements so you know how much you're currently making per month and year.
3. Check your budget: It's also essential to review your budget to see how much space you have for a loan payment. Figure out the maximum payment you can comfortably afford. It is better practice to have an affordable monthly payment with higher interest to maintain a healthy credit score.
4. Identify the loan type you need: Many types of installment loans exist. Identify the type you are looking for (e.g. auto loan, personal loan, business loan, etc.)
5. Shop around: Shop around for lenders that look to be a good fit. Consider their loan amounts, APRs, loan terms, fees, customer service reviews, prequalification processes, funding times, and eligibility requirements.
6. Collect and compare quotes: Once you have a shortlist of potential fits, see if you can prequalify with each or get preapproved for a loan. This process typically requires a soft credit check that will not impact your score. Prequalification is not an offer and terms may be subject to change once you apply.
7. Apply: Apply with the lender that provides the best quote. You'll often have to undergo a hard credit check (which can lower your score by a few points temporarily) and provide documents to verify your income, employment, identity, and address. If collateral is involved, the lender will typically need to appraise it.
8. Sign the contract and get your funds: Upon approval, your lender will present you with a loan contract. Review it carefully and, if all looks good, sign it. The lender can then disburse your loan funds.

Note that while these are the typical steps, the application process varies depending on the type of installment loan you get and the lender you choose. For instance, a personal loan can be approved within days (the same day you apply, in some cases), while a mortgage is likely to take a month or more to close.

Installment loans FAQ

When is an installment loan a good idea?

An installment loan can be a good idea when the loan cost is competitive, your income is stable, and the loan payments fit into your budget with room to spare. If you have any doubts about a loan's affordability or the stability of your income source, it's probably best to hold off.

Do installment loans affect your credit?

An installment loan will affect your credit if your lender reports the account to one or more of the consumer credit bureaus. When reported, your payment activity and amount owed, along with the loan type, loan length, and hard credit inquiry can all impact your credit. If you pay the loan as agreed, it can help to strengthen your credit over time. If you don't, it will cause damage