How Do Installment Loans Work?

Woman giving money to a man

If you’ve taken out a loan in the past, it was probably an installment loan. You may have used it to make a large purchase or to pay off debt, but you of course still had to pay back the loan over time. Here’s how they work.

What is an Installment Loan and How Do They Work?

You won’t see many banks or other lenders actually advertising “installment loans” — this is just a broad term that covers how most personal and commercial loans work.

With an installment loan, you take out money and then pay it back in regular installments, hence the name. Each payment will include a partial repayment of the principle sum borrowed and an interest payment. How much you pay will depend on:

  • Interest Rate
  • Length of Loan
  • Loan Purpose

Most loans people take out over their lives are installment loans, with common examples including mortgages, auto loans, and personal loans, but there are some key differences.

Variable vs. Fixed Rate:

  • Variable-rate loans change the interest rate you pay during the term of the loan. Mortgages are often variable.
  • Fixed rate loans keep the interest rate set from the time of borrowing.

Collateralized vs. Uncollateralized:

  • Collateralized loans are backed by something of value. For example, houses back mortgages and cars back auto loans.
  • Uncollateralized loans are extended based on creditworthiness.

Why Should You Take Out an Installment Loan?

Installment loans aren’t for everybody, but there’s more than one reason why they’re so popular. Just a few benefits include:

  • Flexibility: You can tailor an installment loan around your needs. Adjusting loan amount and term length can help arrive at monthly payments that will work for you.
  • Low Interest Rates: Compared to revolving credit financing, such as credit cards, installment loans provide cash at lower rates. In fact, installment loans are often taken out to pay off credit card debt for just that reason.
  • Manageability: Taking out an installment loan spreads costs over several years, so you can buy something expensive without having to part with one large sum at once.

Find Out More About Installment Loans with Xpress Cash

You’ll find Xpress Cash locations across Idaho, Michigan, and Wisconsin, so feel free to visit your local branch or contact us directly to find out more.