Installment Loans: What Are They and How Do They Work?

Installment loans permit you to take out a specific amount of money at one time. After that, you have to repay it with the set amount of payments known by the term regular installments. 

The fees are typically made monthly. Installment loans tend to be fixed, which means that the loan amount doesn’t alter throughout. Higher rates of interest accompany these loans that last for an extended period.

Installment credit may seem unfamiliar, yet it is far more prevalent than most people believe. In reality, the bulk of loans taken out by the general public are installment loans.

Different Types of Installment Loans

The following are the four most commonly used kinds of installment loans.

Personal Credit

Personal loans can be used for many different projects, including medical emergencies or home improvements. The majority of people repay personal loans in installments that are spread over one to eight years. Personal loans don’t require any collateral or upfront payments in contrast to auto loans.

Mortgage Loans

They are also known as mortgages and home equity loans, which are loans specifically to purchase a house. Most people who borrow this kind of loan over 15-30 years. 

Some mortgages come with fixed interest rates, meaning that they will not increase during the loan duration, but other loans have variable rates. 

To calculate the loan amount, you need to subtract the market value of your home from the remaining balance to pay for the mortgage.

Auto loans

Similar to obtaining an individual loan, borrowers must repay the loan in installments that span 12-96 months. While lenders look at your credit score at the time of the application, there isn’t a minimum credit score needed to qualify for this kind of loan. 

Like mortgage loans, which utilize your home as security, car loans can do similar things with your vehicle. Therefore, if you’re in a position to not pay your loan in full, then the lender may take over your car.

Student loans

The use of student loans is every day, particularly among students studying in colleges. These loans are paid back in monthly installments. In contrast to mortgages, for example, you can defer paying the student loan for a particular time after graduation until you can find a job.

While they aren’t the most enjoyable experience, loan payments are, they play a vital part in creating your credit history and are beneficial for any bank.

What is an Installment Loan? How does it function?

Step 1: Pick the most suitable kind of loan for your needs. The decision to make is based on the reason you need the loan initially. Once you’ve decided on your loan type, it is essential to evaluate loan options since the terms of loan applications differ between lenders.

Step 2. Make an application for the loan. Applying, you’ll require personal information like your address, the Social Security number, and financial data like your earnings and proof of your employment.

Step 3: Use your loan.

Step 4: Pay your installments. In case you’re wondering, this happens frequently, usually once per month. You’ll keep paying until you’ve paid back the loan in total.

The Bad and Good Installment Loans

The image below outlines the significant advantages and drawbacks of installment loans.


  • Predictable payments make it simpler to create and maintain the budget.
  • Installment loans give you an end-to-end final. You’ll feel more secure of peace of mind knowing that your loan will be fully paid back after a set period.
  • Installment loans can be used to make payments on big purchases. Based on the type of loan, you’ll be able to choose the amount of loan that best suits your financial needs.


  • When you have decided that the size of your loan has been set, it cannot be modified. You must be aware of the exact amount you’ll need before taking out any loan. If you’re looking to have flexibility, you might consider other strategies for financial planning.
  • The quality of your credit background determines the interest rate of the loan. Credit scores that are low or fair compared to excellent or good scores may prevent you from getting the loan. If you’re approved, you’ll probably have higher rates to cover the risk.
  • Your monthly installments could come with additional charges as application fees and penalties for late payments.

Secured versus Unsecured Installment Loans

Secured loans mean that the borrower is required to provide collateral. A secured loan does not require collateral. It isn’t needed. However, you’ll pay higher interest. Secured loans also heavily depend upon the borrower’s credit background.

The maximum amount of credit for secured loans is limited to the amount you want. If you are borrowing unsecured, the limit is set at $50,000.

Furthermore, a secured line of credit is frequently used for larger expenditures, which is why the most well-known example is a mortgage. Unsecured loans, on the other hand, are typically approved for more realistic pursuits.


Do installment loans impact my credit score?

These loans can affect your credit score. However, that impact could be positive or negative. Pay history is the only significant factor that affects the calculation of your score. Paying on time will positively impact your score.

The variety of credit is also a factor in your score, and taking out a loan is beneficial not just in building your credit history but also in diversifying it.

What are the criteria to be considered for installment loans?

The most efficient method to increase your chances of getting a loan is to establish an impressive credit record in addition to a high credit score. 

However, every loan is unique, and therefore it is dependent on the kind of loan you’re interested in. Be sure to conduct your homework or talk to a financial adviser to ensure you know any regulations.

IPASS Contribution

The key to obtaining loans and subsequent installments is understanding how to borrow and spend your money wisely. 

If you manage your money correctly and prudently, you’ll be able to have the funds to repay the lenders. Learning how to manage money with care is a talent that requires time to master.

So, without further ado, let us introduce you to IPASS. The IPASS Card is for those who wish to spend their own money while still earning incentives.

IPASS Card is a tool that offers you the flexibility and chance to select what you spend your money on, whether it’s groceries, loan and bill payments, or a night out at the movies.

It comes with fraud protection and no interest rates. Cash-back on all purchases, plus bonus cash-back on subscriptions, food delivery, ridesharing services, vehicle, phone insurance, and more, are additional benefits.