An installment loan is one of the most common ways people borrow money. You receive a set amount up front, then pay it back over a fixed period through regular, scheduled payments. Car loans, mortgages and many personal loans all work this way.
If you are considering one, it helps to understand how the pieces fit together so you know exactly what you are agreeing to.
How an installment loan works
When you are approved, the lender gives you the full loan amount at once. In return, you agree to a repayment schedule, usually monthly, that runs for a set number of months. Each payment covers part of the amount you borrowed (the principal) plus interest.
With a fixed-rate installment loan, your payment stays the same from the first month to the last. That predictability is the main reason people choose installment loans over revolving credit like credit cards.
The key terms to know
- Principal: the amount you borrow.
- Term: how long you have to repay, such as 6, 12 or 24 months.
- Interest rate: the cost of borrowing, expressed as a percentage.
- APR (annual percentage rate): the yearly cost of the loan, including interest and certain fees. APR is the best number for comparing offers.
- Total of payments: everything you will pay over the life of the loan if you make every payment on schedule.
Federal law requires lenders to show you the APR, finance charge, amount financed and total of payments before you sign, so you can see the full cost up front.
How your payments are applied
Early in the loan, a larger share of each payment goes toward interest. As the balance shrinks, more of each payment goes toward principal. This is called amortization. If your loan has no prepayment penalty, paying extra or paying off early reduces the total interest you pay.
Installment loans vs. other options
Unlike a credit card, an installment loan has an end date, so you know exactly when you will be done. Unlike a payday loan, which is usually due in full within a few weeks, an installment loan spreads repayment over months, which can make each payment easier to fit into a budget. Learn more in Installment Loans vs. Payday Loans.
Is an installment loan right for you?
An installment loan can make sense for a one-time expense you can’t cover from savings, such as a car repair, medical bill or moving cost, as long as the monthly payment fits comfortably in your budget. Before you apply, read our guide on how much you can afford to borrow.
Have questions? Our Las Vegas team is happy to walk you through how a loan would work for your situation. Call 702-330-0458 or stop by our office on West Tropicana.
