Key Takeaways
- You can use personal loans for a wide range of purposes
- Mortgages are installment loans specifically for purchasing houses
- Auto financing loans are installment loans designed to help you purchase a vehicle
- Student loans are installment loans specifically for use to fund your education
“Installment loan” is a term that refers to personal and commercial loans that allow you to borrow money from a lender. You can repay this loan over time in monthly payments, also known as installments, at a fixed interest rate. Installment loans are a handy tool to help you manage personal finances better, especially if you need to make it easier to pay off a substantial debt.
Personal loans are the most common type of installment loan people know of. However, several other types of loans also fall under installment loans, including mortgages, auto loans, and student loans. Knowing the difference between the types of loans can make a big difference in helping you achieve your financial goals.
Today’s post will give you a quick overview of the different types of installment loans to help you make a better-informed decision.
The Most Common Types of Installment Loans
Installment loans come in several forms. While they work similarly, each type of installment loan has specific features that make it ideal for different purposes.
Personal Loans
A personal loan is when a borrower gets a predetermined amount of money from a lender, typically a sizable amount they can repay over time. The borrower must repay the loan at a fixed interest rate over a predetermined period. The repayment terms for personal loans can vary drastically, ranging from 24 months to 72 months. Unlike several other installment loan types, borrowers can use the money from personal loans for various purposes. You can get personal loans from online lenders, credit unions, and private lenders.
Mortgages
Mortgages are another common type of installment loan. It is money you borrow, typically from financial institutions like banks, to purchase a house. Mortgage loans also come with fixed repayment periods and interest rates. Unlike personal loans, mortgages are specifically for financing a home purchase. They also come with longer repayment periods, ranging from 15 to 30 years. The interest rate for these loans tends to be lower since they are backed by collateral, i.e., the property a borrower purchases using the loan.
Auto Financing Loans
Also called auto financing and car financing loans, auto loans are another popular installment loan type. A borrower typically makes a down payment on a car they wish to purchase, making monthly payments to the lender until they fully pay off the car’s value and the interest they owe the lender. The vehicle serves as collateral in auto loans.
Student Loans
Student loans are a common type of installment loan that many are well aware of. Federal and private student loans are the two primary types of student loans, and both have the same purpose: financing the borrower’s education. Federal student loan programs offer several advantages, ranging from standardized interest rates to income-driven repayment plans and the option to defer payments.
Final Thoughts
You can get installment loans through credit unions, banks, or online lenders. When purchasing a vehicle, the dealership might even offer you in-house financing, allowing you to borrow directly from them instead of waiting for approval from a bank.
Installment loans can be an excellent option for people who need to manage large expenses, make big-ticket purchases, or deal with financial emergencies. However, before applying for any type of installment loan, it is important to study each type of loan, how it works, and its pros and cons. Getting a loan you cannot afford can devastate your long-term financial health.
Taking your time to conduct your due diligence when shopping for installment loans to find loan products with favorable terms can make a world of difference in improving your financial situation.
Updated January 30, 2023