What Kind of Accounts Are Considered Installment Loans?

Identification

• An installment loan occurs when you borrow a specific amount of money and repay it in fixed installments, typically on a monthly basis. The term of the loan also lasts for a predetermined time. At the end of the term, you have fulfilled your obligation, assuming you have made all your payments as scheduled. Depending on the contract terms, you can pay additional amounts without penalty, allowing you to retire the debt sooner.
  
  

Types

• An installment loan may be secured or unsecured. Common examples of secured installment loans include home mortgages and auto loans, where the lender has the right to reclaim the property if you default on the payments. An example of an unsecured installment loan is when you borrow money from a consumer finance company or take out a student loan. Because there is no property for the lender to reclaim, the lender is at higher risk in the event you default. Therefore, unsecured installment loans sometimes come with a higher interest rate than secured loans.
  
  

Advantages

• Installment loans offer some advantages over revolving debt instruments such as credit cards. Installment loans are a type of closed-end credit, meaning there is no danger of getting deeper into debt by increasing the amount you borrow. Having fixed payments for the life of the loan provides an element of stability, as you know exactly how much you need to budget for your loan payment each month. In the case of auto and home loans, you will own a valuable asset when you have paid the loan in full.
  
  

Disadvantages

• One disadvantage of installment loans is that they offer limited flexibility. Unlike credit cards where you can get by with paying a small minimum amount each month if funds are low, you must pay the scheduled installment amount each month. If you default on a secured installment loan, you can lose valuable property. If you need more money, you'll have to go through the process of applying for a new loan instead of simply borrowing more against an existing debt instrument.