Borrowers pay off installment loans in regularly scheduled repayments over a predetermined payment schedule. Generally, every loan payment is a set amount that the borrower pays in monthly installments. The monthly payment typically comprises part of the loan amount and a portion of the interest that has accrued on the loan.
Unlike revolving credit such as a credit card, installment loans have an end date. Aside from the lump sum and interest, borrowers may also have to pay a loan origination fee, prepayment penalties, and late payment fees.
There are two main types of installment loans. Secure installment loans, such as an auto loan, mortgage loan, or home equity loan, require collateral. Unsecured installment loans, such as student loans or personal loans, don't require collateral.
For the most part, installment loans have a fixed interest rate. Financial institutions like credit unions, banks, and online lenders may use your credit score, credit report, and income to determine your creditworthiness and the loan's interest rate.
It's likely that the lender will check your credit history with at least one of the major credit bureaus. Borrowers with a positive credit history and high credit score will be more likely to receive a lower interest rate, which can result in lower monthly payments and favorable repayment terms over the term of the loan.
Those with bad credit will usually have to pay back an installment loan at a higher interest rate. They also could have difficulty finding a lender willing to extend credit. Borrowers who need money and can't qualify for an installment loan at a traditional financial institution may turn to alternative banking services to find lines of credit.