The Different Types of In-Store and Online Installment Loans

 

Nowadays, installment loans are quite common. In fact, just about every loan you pay back at regular intervals is most likely an installment loan. Installment loan payments, also known as installments, are typically made on a monthly basis and are composed of both principal (the original amount borrowed) and interest (the cost of borrowing your funds). The interest rates for installment loans are usually either fixed or variable. Fixed rates remain constant, while variable rates can fluctuate over the life of the loan. 

Another common aspect of an installment loan is that it can be either secure or unsecured. A secured loan is backed by collateral, which is usually the thing you’re getting the loan for. When you get a mortgage, the home itself is usually the collateral, and your new car is usually the collateral for an auto loan. A unsecured loan isn’t backed by any collateral, which makes it riskier for lenders. Securing an installment loan can have an impact on your credit. If you make timely payments, your credit score may improve, while missing or making late payments can harm your credit.

Common types of installment loans include personal loans, mortgages, student loans, and car loans. Let's explore the differences between these types of installment loans.


Personal Loans

A personal loan is a type of installment loan where a borrower can get a lump sum of money.  These loans don't have to be used toward a specific purpose (like a car or house), but, rather, can be used for any reason you see fit. You can secure a personal loan from online lenders like Xact, credit unions, or banks. Personal installment loans are often used for unexpected bills like medical bills, weddings, auto repairs, and home repairs. This type of loan is often unsecured, so they don’t require collateral. Borrowers pay back personal loans in fixed installments over an agreed period. This kind of information can be found in the terms of your loan. Getting approved for a personal loan and the interest rate you receive is typically based on your credit score, income, and ability to repay.

Auto Loans

These are loans that you can get through a dealership or directly from a bank to finance a new or used car. Most car dealerships have relationships with a variety of lenders who all want your business, as long as your creditworthiness meets their lending criteria. These loans come with fixed interest rates and (typically) monthly payment due dates. Auto loans usually range from about 2-7 years. At the dealership, they’ll commonly go by months instead of years. For example, it’s common to hear about 60-month financing instead of 5-year financing at a dealership. 

Once your auto loan is paid off, you own your vehicle. An auto loan is secured with the car you’re financing. This means that the lender has the right to repossess your vehicle to recover outstanding debt. When your car is repossessed, you not only lose your vehicle, but your credit can take a hit. Repossessions are usually reported to the 3 main credit bureaus: Transunion, Equifax, and Experian. Keep in mind, there are different ways to improve bad credit.


Mortgage and Home Loans

A mortgage is a type of installment loan that's specific to real estate. Mortgages are secured by the property itself. This means that if a borrower defaults on their mortgage, the lender can seize the property through foreclosure. Types of mortgages vary depending on the lender, the type of dwelling you're purchasing, your credit history and credit score, whether or not you are a first-time homebuyer, and other factors. 

Mortgages are typically repaid over a span of 15 to 30 years on a (typically) monthly basis. Shorter-term loans, like a 15-year mortgage, will generally have higher monthly payments, but lower overall interest costs. It’s more common to go with a longer-term loan, like a 30-year mortgage, to be able to pay lower monthly payments.


Buy-Now, Pay-Later

Need some new power tools but don't have all the money right now? Maybe you’d prefer to break up the payments instead of paying in full? Then a short-term financing option like a buy-now, pay-later (BNPL) loan could work for you. Going with a BNPL option is similar to layaway, which allows customers to make a deposit and pay their balance over time. Few stores offer layaway anymore as they fell out of popularity in the 1990s as credit cards became more and more popular. Technology has introduced consumers to new financing methods.

BNPL is a type of installment loan that's only spread out over a few payments — until the smaller-ticket item is paid for. Sometimes you can get these loans right at the point of purchase. Usually, payments to BNPL platforms are automatically debited from your bank account or charged to your credit card. Payment terms can include late fees and/or interest. BNPL might seem like a convenient and simple solution for when money’s tight, but it can be a slippery slope to overspending. Bankrate reports that 56% of buy-now, pay-later users have experienced problems like overspending and missing payments.


Student Loans

Many people rely on student loans from the federal government and/or private loans from other lending institutions to cover the costs of their education. Students secure these loans to pay for post-secondary education, and the associated costs, including tuition, books, and living expenses. Student loans often come with more flexible repayment options to accommodate the financial needs of students. Borrowers typically don’t need to start making payments on these installment loans until they graduate or stop attending school. The various types of federal student loans include:

  • Direct Subsidized Loans
    • Available to undergraduate students who show that they have a financial need.
    • No interest is accrued while the student attends their school for at least half-time, or during the 6-month grace period after students conclude enrollment.
  • Direct Unsubsidized Loans
    • Available to both undergraduate and graduate students, regardless of need.
    • Students accrue interest as soon as they receive their loan
  • Direct PLUS Loans
    • Available to graduate and professional degree students, as well as parents of undergraduate students.
    • Interest starts accruing as soon as loans are dispersed.
  • Direct Consolidation Loans
    • Gives student loan recipients the ability to combine multiple federal student loans into a single loan with one monthly payment.

Installment loans come in many forms, each tailored to meet different financial needs. As with any financial product, it’s a good idea to review the terms, interest rates, and repayment schedules when choosing a loan that best fits your financial goals and budget.