A fixed installment loan is a loan that is paid back over a specific period of time with a set number of scheduled payments. It can be either a secured loan or an unsecured loan. Auto loans and mortgages are examples of secured loans. Personal loans and student loans are examples of unsecured loans. All of them are installment loans.
An installment loan differs from an open line of credit, for instance, which offers a maximum credit amount you can repeatedly borrow against, or payday loans, which tend to be small amounts at high interest rates.
Terms and interest rates of personal installment loans
The amount of time or “term” of the loan will depend on exactly what is being financed. A personal loan from Discover, for example, ranges from 36 to 84 months. During that time, the entire principal and interest of the personal loan is paid back in equal increments on a monthly basis. For example, if you get approved for a $15,000 loan at 12.99% APR for a term of 72 months, you’ll pay just $301 per month. Other types of loans may be shorter or longer. As with most loans, your interest rate will depend on your credit score, financial situation, and whether the loan is secured or not.
Many people are familiar with mortgages and car loans but here are some different types of installment loans:
- A personal loan
- Home equity loan
- Home repair financing
- Appliance or technology financing
- Health care financing
A key difference between an installment loan and open kinds of loans is the time period within which you have to pay back the funds that you have borrowed. Credit cards, open lines of credit, payday loans, or title loans are not considered installment loans.
For example, with a credit card, you have a credit line that you can repeatedly borrow against and you are only required to make a minimum payment each month. The minimum payment is usually calculated as a percent of your balance, down to a set minimum. You could continue making a minimum payment while also spending up to your available credit line without a defined end date.
Disadvantages of these types of loans include fluctuating payment amounts and a potentially longer time to pay off the debt, especially if you keep accessing an open credit line.
Why use an installment loan?
Installment loans can offer the advantage of predictability. Knowing what your monthly payment will be each month, and the set number of months, will allow you to plan and budget accordingly.
If you have good credit and a strong financial history, a personal loan may be a good type of instalment loan to help you reach your goals. You can receive a competitive fixed rate with flexible repayment options and take advantage of a potentially lower monthly rate than other forms of credit or variable interest rate debt.
Will applying for a personal installment loan affect my credit?
With a Discover personal loan, you can see if you qualify plus get rates and learn payment details in advance, all without impacting your credit score. If you accept these terms and submit a full application, only then will we do a hard credit pull in order to make a final decision. A hard credit pull can affect your credit score.
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