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An installment loan is a lump sum of money that you borrow and repay in regular payments — or installments — over a period of time, usually months or years.
An installment loan is a common type of loan that’s used to pay for a car, house or other large purchase. You may even have an installment loan that goes by another name, like a mortgage.
Personal loans and installment loans are two common ways that people can borrow money But what exactly is the difference between the two? As a consumer looking to take out a loan, it’s important to understand the key distinctions.
In this article, we’ll break down the differences between installment loans and personal loans We’ll cover topics like
- What are installment loans and personal loans?
- How do they work?
- What are the pros and cons of each type of loan?
- Who offers installment loans vs personal loans?
- How to decide which type of loan is right for you
By the end, you’ll have a clear understanding of installment loans vs personal loans so you can choose the best option Let’s dive in!
What Is An Installment Loan?
An installment loan is a lump sum of money that you borrow and repay in regular payments or installments over a period of time, usually months or years.
Installment loans allow you to finance larger expenses by spreading out the repayment over time. Common examples of installment loans include:
- Mortgages
- Auto loans
- Student loans
- Personal loans
- Home equity loans
The amount you borrow with an installment loan is fixed. You receive the full loan amount upfront and make payments of principal and interest until it’s fully paid off. Installment loans have fixed interest rates and terms.
What Is A Personal Loan?
A personal loan is a specific type of installment loan. Personal loans provide an upfront lump sum that gets repaid in fixed installments over time.
Personal loans can be used for almost any purpose. Common uses include:
- Paying off high-interest debt
- Funding home improvements
- Paying medical bills
- Financing a vacation
- Funding a wedding
- Making a major purchase
Personal loans are provided by banks, credit unions, online lenders, and other financial institutions. They have fixed terms ranging from 1-7 years usually.
The main difference between a personal loan and other installment loans is a personal loan is unsecured. That means it doesn’t require any collateral.
Comparing How Installment Loans And Personal Loans Work
Now that we’ve defined installment loans and personal loans, let’s compare how they actually work:
Key Steps With An Installment Loan:
- Apply and get approved for a specific loan amount
- Receive the lump sum upfront
- Repay the loan in fixed installments with interest over a set term
- Installments go towards paying down principal and interest
- Once repaid, the loan is closed
Key Steps With A Personal Loan:
- Apply and get approved for a loan amount based on credit
- Receive the lump sum upfront
- Repay the loan in fixed installments over a set term
- Installments go towards principal and interest
- Once repaid, the loan is closed
As you can see, the process is essentially the same! The key difference is personal loans are a specific type of installment loan that is always unsecured.
Major Pros Of Installment Loans
Installment loans have several advantages that make them useful for consumers:
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Ability to finance larger expenses – Borrowing a lump sum allows you to pay for big-ticket items like a house, car, or college tuition.
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Predictable payments – Installment loans have fixed interest rates and terms so you know exactly what to expect each month.
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Can build credit – Making on-time payments shows responsibility and helps improve your credit score.
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Flexible uses – Installment loans can be used for almost any purpose from small emergencies to major purchases.
Potential Cons Of Installment Loans
However, there are some potential downsides to keep in mind as well:
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Debt obligations – You take on long-term debt and the responsibility to repay it fully.
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Interest charges – Interest expenses increase the total cost over time.
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Collateral required – Secured installment loans require an asset like a car or house as collateral if you default.
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Credit check – Applying requires a hard credit inquiry which can temporarily lower your credit score.
Advantages Of Personal Loans
As a type of installment loan, personal loans share the same general pros. But they also have some additional benefits:
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Quick access to cash – Personal loans fund in as little as 1 business day after approval.
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Unsecured – No collateral is required, so your assets are not at risk.
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Many lender options – You can shop and compare offers from banks, credit unions, and online lenders.
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Credit building – Responsible use can help build your credit history and score.
Potential Downsides Of Personal Loans
Personal loans also come with a few disadvantages:
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Unsecured status – This makes interest rates higher than secured installment loans.
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Qualifying can be difficult – Lenders have stricter credit requirements without collateral.
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Not for large sums – Personal loans have lower borrowing limits than mortgages or auto loans.
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Predatory lenders – Avoid high-interest payday and title loans that create debt traps.
Who Offers Installment Loans Vs Personal Loans?
You can get installment loans and personal loans from a variety of sources:
Installment Loans
- Banks – Offer installment loans like mortgages, auto loans, and personal loans
- Credit unions – Provide installment loans to members
- Online lenders – Specialize in quick installment loans with easy applications
Personal Loans
- Banks – Large national banks provide personal loan options and competitive rates
- Credit unions – Ideal source for personal loans with low rates and fees
- Online lenders – Can match you with personal loan offers through a marketplace
Always compare multiple lenders to find your best personal loan option. Avoid shady payday and title loans.
How To Choose: Installment Loan Vs Personal Loan
So how do you decide what type of loan is right for your situation? Here are a few key considerations:
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Loan purpose – Installment loans are better for large expenses like a home or car. A personal loan is more suited for medium amounts of cash.
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Interest rates – Compare rates on both to see which loan is more affordable. Personal loans may have higher rates.
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Fees – Both loan types can have origination fees. Compare total costs.
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Term length – Personal loans have shorter terms of 1-7 years. Installment loans can be 15-30 years for mortgages.
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Credit required – Personal loans have stricter credit requirements than secured installment options.
Once you evaluate these factors, you can determine if an installment loan or personal loan better fits your needs. Be sure to compare multiple lenders for the best offers.
Tips For Finding The Best Loan For You
Here are a few final tips on finding the right installment loan or personal loan:
- Check your credit score so you know your rate range
- Calculate the monthly payment to ensure it fits your budget
- Read loan terms carefully and avoid prepayment penalties
- Apply with multiple lenders to compare loan offers
- Negotiate for the best rates, fees, and terms
- Avoid payday loans and other predatory lending products
The Bottom Line
Installment loans and personal loans give you access to lump sums of cash and allow repayment over fixed periods of time. While personal loans are a type of installment loan, the main difference is personal loans are always unsecured.
When choosing a loan, compare interest rates, fees, credit requirements, and lender options carefully. This ensures you get the funding you need on the best possible terms!
Pros and cons of installment loans
Installment loans can make large purchases more manageable, but it’s important to weigh the pros and cons alongside other financing options to choose the right one for your plans.
Pay off a large purchase over time.
Fixed-rate loans have predictable payments.
On-time payments build your credit.
You may be able to refinance for a better interest rate or loan term.
Once you borrow, you can’t easily borrow more.
Interest rates may be high, especially if your credit score is low.
Missed payments can hurt your credit.
Repayment terms can be long, leading to high interest costs.
Mortgages
With a mortgage, you borrow the value of the house, minus your down payment, and agree to repay the loan with interest in monthly increments. Mortgages are typically repaid over 15 or 30 years.
In this case, the installment loan is secured by the home. After too many missed payments, you risk losing it.
A home equity loan, which is a second mortgage you might take to pay for home improvements, is also an installment loan.
The Pros and Cons of Personal Loans
FAQ
Is an installment loan the same as a personal loan?
What are the disadvantages of an installment loan?
Do installment loans hurt your credit?
What is the difference between a term loan and an installment loan?
Should you get an installment loan?
Using an installment loan comes with the following advantages: Fixed monthly payments are easier to add to a budget than fluctuating payments. Lower interest rates could make this option less expensive than revolving credit. Funds are delivered in a single lump sum rather than being borrowed in smaller increments.
What is an installment loan?
Here are some key points about installment loans: – **Closed-End Debt**: Installment loans are a type of closed-end debt, which means you pay it off over a set number of years, also known as your loan
What is the difference between a personal loan and an installment loan?
Installment loans, in general, refer to loans that are repaid in fixed monthly installments over a specific period. Personal loans, on the other hand, are installment loans that can be used for various purposes, such as debt consolidation or unexpected expenses.
How does a personal installment loan work?
You apply for a personal installment loan with a 5% annual percentage rate (APR) and a loan term of 3 years. If approved, you’ll receive the full $10,000 upfront. Over the next 36 months, you’ll make fixed monthly payments, including principal and interest, until the loan is fully repaid.