What Is an Installment Loan? How Does It Work?

There are numerous types of loans available. An installment loan is one of such loans. It refers to the loans which are paid in installments over an agreed period of time. These payments are often scheduled yearly or monthly etc. The payment usually covers a specific portion of the debt including interest.

The amount of loan, interest rate, and terms of a loan are factors that are normally considered by the borrower. Auto loans and personal loans are some examples of installment loans. These loans can be further categorized into two types:

1. Collateralized

2. Non-collateralized

The only installment loan that is collateralized is mortgage or auto loan. The purchased house or car is used as collateral. Voiding any of the terms of the loan agreement will allow the bank or lender to seize your asset. On the other hand, the non-collateralized installment loan does not have any collateral. Since there is a higher risk for the lender, a non-collateral loan has a higher interest rate.

How Does It Work?

Receiving an installment loan is not a difficult process. The borrower simply has to submit an application for the loan. The lender evaluates the financial information of the borrower before approving the loan. The credit score of the borrower allows the lender to assess the risk. If the application is accepted, the lender presents the borrower with a few options depending on the risk.

The options have different interest rates, down payments, number of installments, and terms of the loan. The only installment loan that may increase interest rate over time is mortgage loan. To summarize, the installment loan process is:

1. Check If You Qualify for the Installment Loan: The factors considered by the lender for an installment loan are the age, income, credit score, and employment.

2. Applying for a Loan: There are three ways to apply for a loan: online, visiting the branch, or through the phone.

Submit an application after filling out your details. This service is available at all times for your ease. There are no extra charges and the process is safe, secure, and easy.

Visiting the Branch
Bring all the necessary documents and discuss your loan options with the branch representative. Discuss the loan process and figure out the details.

Through the Phone
You attain enough information over the phone for the loan.

Advantages Of Installment Loans

An installment loan has the following advantages.

  • Compared to other loans, you can expect a stable interest rate on an installment loan. Since the interest rates are fixed, you do not have to worry about the interest rates increasing.
  • A long-term installment loan has smaller monthly payments that are easier to meet. By coordinating with your lender, it is possible to make a payment schedule that is suitable for you. For example, you can opt for a long-term loan that will be easier to pay off.
  • You can also opt for a short-term loan that will clear all your debts earlier.
  • Unlike other small loans, you do not have to wait for a long period of time to know whether your loan has been approved or not.


There is always a negative side to all good things. Similarly, installment loans have a few aspects that are disadvantageous.

  • An installment loan binds you to make payments because you are obligated to make them.
  • Despite being in a tedious financial situation, you would have to pay the loan. Failure in payment of installment loan can lead to the seizure of collateral or default.
  • Some lenders charge a penalty for paying the loan earlier.
  • Long-term installment loans may have a periodically smaller amount to pay but they have a higher interest rate.
  • A loan that is in default will have a negative impact on your credit score.
  • If the market interest rate for loans decreases, your fixed interest rate will stay the same. In that case, you would be paying more than you should in order to adhere to the terms of your installment loan.
  • Once you sign off and agree to the terms in an installment loan, none of the terms and aspects of the loan can be renegotiated.

Credit Score and Installment Loans

To improve your credit score you can take out an installment loan. This will not only improve your credit score but will also be beneficial to pay off the debt in monthly payments. If you may recall, paying debt on time has a higher weightage in the evaluation of your credit score. Thus, the periodic installments will have a periodic increase in your credit score. However, do not raise your expectations because the credit score has a mildly positive increase.

Tips for Loan Approval with Poor Credit Score

Getting a loan with a poor credit score is difficult. However, the task is not impossible. People with a poor credit score can still apply for an installment loan by considering the pointers mentioned below:

  1. Collateral - The biggest concern of a lender is the risk of approving the loan to a person with a poor credit score. Providing collateral can eliminate the risk factor entirely. If you fail to make any payment, the lender will always have the collateral. This insures the punctual debt payment of installment loan. 
  2. Credit Union - As mentioned earlier, the only thing that a lender is concerned with is a risk. To receive approval to an installment loan with your poor credit score, you can find a credit union. A credit union decreases the risk, which may encourage the lender to approve the loan. 
  3. Online Lenders - If the bank rejects the approval to your loan, you can always find a lender online. Search on the internet for someone that might be willing to lend money. You may also find a financial expert that can get you an installment loan
  4. Short-Term Loan - The last option that can be utilized is a short-term loan. A shorter loan will have higher interest rate but a lower risk. The lender will not be afraid that you are not going to make the payment in the future.

In conclusion, a borrower with poor credit score will have to jump through some hoops to get approved for an installment loan. It can also be a useful tool to rebuild your credit score. A non-collateralized installment loan would be ideal but nearly impossible for the poor credit score holder. Suffice to say, you should be content with a collateralized installment loan that will allow you to improve the credit score.