An installment payment is a monetary payment made on a loan that has been disbursed. It is a periodic payment that is typically of a predetermined amount that includes a percentage of interest as well as a percentage of principal. There is the potential for the amount of an installment payment to vary if the loan itself has a variable interest rate, which is common on some mortgages or student loans.
An installment payment is a common type of repayment plan for many loans. Auto loans, home mortgages, home equity loans, or student loans are typically installment loans. This means that the borrower often receives a statement with the number of installment payments remaining on the loan. For example, a five-year auto loan will consist of 60 installment payments of equal amount, or one installment payment per month.
By paying a little extra on the predetermined payment amount, it is often possible to pay off the loan in an even shorter period, but it is important to read the fine print and determine whether or not there is a prepayment penalty. This is not common, but it does happen. In most cases, a loan with a fixed interest rate will have an installment payment that remains the same throughout the life of the loan, unless a different type of payment plan was arranged with the lender. Loans with variable interest rates will, naturally, cause the monthly payment amount to vary as well.
An installment loan differs from a revolving line of credit because a revolving line of credit may be paid off and used over and over again, and the payment amount will be based on the monthly balance. In an installment loan, the installment payment is based on the initial amount of the loan plus interest that will accrue over the life of the loan. In some installment loans, equal amounts of principal and interest are paid in each monthly payment, but other loans start off with more going toward interest and less going toward principal each month.
Over time, this ratio will be reversed, until all the interest is paid off, and the entire payment goes to the principal amount. This will be specified in the loan documentation. Installment loans are beneficial for a number of reasons, but primarily because they will typically not cause any surprises; it is easy for borrowers to plan for the installment payment in a monthly budget.