If you’ve ever needed to borrow money and repay it over time in equal chunks, you’ve probably used installment loans — even if you didn’t know it. Installment loans are one of the most common types of loans for people looking to finance big purchases or consolidate debt.
But how do they work? Why are they different from payday loans or credit cards? And most importantly — are they right for you? CreditWishes is going to explain installment loans briefly, so you could make sure you’re making the right financial choice.
- Installment loans let you borrow a lump sum and repay it in fixed monthly payments.
- They usually come with fixed interest rates and clear loan terms.
- They’re better than payday loans for long-term borrowing needs.
- Missed payments hurt your credit score and can lead to fees.
What Are Installment Loans?
Installment loans are loans where you borrow a fixed amount of money and pay it back in regular, equal payments. Each payment goes toward the loan’s principal (the original amount) and interest (the cost of borrowing).
You know the exact amount due every month. No surprises. No changing balances like with credit cards.
In a nutshell, here’s how it works: you borrow $5,000 with a 10% interest rate over 2 years. Each month, you pay the same amount — part goes to interest, the rest lowers your balance. Once you hit month 24, boom — it’s paid off.
Types of Installment Loans
Installment loans come in a bunch of flavors. Let’s look at the most common types:
Personal Installment Loans
Personal installment loans are the most common ones, as these can be used for almost anything – debts, emergencies, even vacations.
There’s no collateral needed and these are usually quite great options, if you’ve got decent credit.
Auto Loans
As the name states, auto loans are meant for buying a car.
The car is collateral, so if you stop paying, the lender can take it back.
Mortgages
Mortgages don’t need a long introduction – these are meant for buying a home.
Repayment terms are often very long, even up to 30 years.
Bad Credit Installment Loans
Bad credit installment loans are reserved for borrowers with low credit scores. These often have high interest rates and stricter terms.
Due to the low credit score, these can be rather dangerous options, so be vigilant. However, these are normally better than payday loans.
Online Installment Loans
Online installment loans have become immensely popular due to quick approval. Some of the more common options include companies like LendingClub and Upstart, but these days you can find tens of different options for applying online.
Pros and Cons of Installment Loans
If you’re doubting whether installment loans are right for you, below you’ll find a quick breakdown of some pros and cons you might want to consider:
Who Should Use Installment Loans?
Installment loans aren’t, of course, meant for everyone nor for every situation. Before you rush into anything, consider whether installment loans could even work for your situation. It might be a good idea if:
- You need money for a big expense (car, home, renovation).
- You want structured payments you can plan for.
- You’re tired of juggling multiple high-interest debts.
However, we’d tread lightly if your income is unstable, you’re already heavily in debt, or you’re not entirely sure if you can actually keep up with monthly payments.
FAQs About Installment Loans
What’s the difference between installment and payday loans?
Installment loans are repaid over time. Payday loans are due in full within weeks and come with sky-high interest.
Can I get an installment loan with bad credit?
Yes, but expect higher interest rates. Lenders offset risk by charging you more.
Are online installment loans safe?
Online installment loans can be safe, but only if you stick to known platforms. Watch out for shady sites promising “guaranteed approval”.
Last Updated on June 11, 2025
