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What are Installment Loans?

Tricia Christensen
Updated: May 16, 2024

Installment loans can be for any amount of money, depending on type, and they typically have a fixed repayment schedule. A common example of this type of loan is the car loan that lasts four or five years. In return for receiving the loan, a person usually agrees to pay a certain amount each month, which usually doesn’t change for the length of the loan. Similarly some mortgages are structured to be paid in monthly installments.

The above loans differ from credit cards because though people pay credit bills each month, the amount can be different. Some months people could owe nothing if they’ve paid off their card, but payments can renew when they make more charges. The way each installment payment is figured may be slightly different than the way credit card payments are determined. With many installment loans, the total amount of the loan including interest is divided into monthly installments which will terminate at a set point, for instance 48 or 60 months after an auto loan.

One good thing about many installment loans is that they have a set payment, due at a specified time, and the total amount of the loan gradually decreases. Some people may be able to alter the time at which it takes to pay off a loan by greatly increasing their payments or making payments to the principal. This doesn’t work for every loan. Some people will still pay all interest owed, or will simply be viewed as having made the next payment due if they try to increase amounts over the agreed upon installment payment.

In recent years, one type of new loans offered in installment form are payday installment loans. These differ in many ways from other types of loans people might be able to obtain. Moreover, they tend to most be marketed to people with very little money.

A payday loan is an advance on a paycheck that must get paid with any associated fees when a person cashes his next paycheck. Oftentimes, people might need money in the nature of about $1000 US Dollars (USD) or a little more, but once they spend it, they’ll still need their paycheck money to meet regular expenses. Enter payday installment loans, which allow people to make installment payments on a small loan, instead of having to pay it all at the same time.

Unfortunately, these loans come with extremely high interest rates, usually at minimum 30%, which is higher than the average high interest credit card rates in the US. Attempts are being made to regulate these rates, because they can be even higher and tend to be incredibly costly to the borrower. While such loans might be a good plan for a person who absolutely needs money and has no other choice, repayment could end up doubling the amount paid. People are advised to be cautious about these loans, but installment loans in general are a normal lending practice and are nothing to be feared.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Tricia Christensen
By Tricia Christensen
With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia Christensen is based in Northern California and brings a wealth of knowledge and passion to her writing. Her wide-ranging interests include reading, writing, medicine, art, film, history, politics, ethics, and religion, all of which she incorporates into her informative articles. Tricia is currently working on her first novel.
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Tricia Christensen
Tricia Christensen
With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia...
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