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What is an installment loan?

There are many different kinds of personal loans. From the credit card in your wallet to the mortgage on your house to the money you borrowed from a family member, the sheer number of financial products out there can be overwhelming.

An installment loan is probably the most common type of personal loan. With an installment loan, you pay back the amount borrowed (called the principal) plus any accrued interest in regular payments over a pre-determined period of time. The length of the repayment term can range from 6 months to 3 years.

The principal will accrue interest over the life of the loan. The longer the repayment term, the more interest accrues and the more you pay. Even though your regular payments will be lower on a loan with a longer repayment term, you will end up paying more due to the increased amount of interest accrued.

Payments are usually made monthly or twice-monthly, depending on the terms of the loan agreement. The payments will always be in the same amount unless the interest rate changes at some point over the term of loan. It is always a good idea to check whether or not your loan has a fixed or a floating interest rate. If you have a floating interest rate and the rate goes up in, say, year 2 of a 3-year term, your monthly payments will increase.

There are also additional charges that will likely factor into the cost of your loan. They might even be deducted from the principal. For instance, if you have a $1,000 loan with a 10% origination fee, you will only receive $900.


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