What Is an Installment Loan? [Video Included]



Define Installment Loan

An installment loan is a set amount of money that is borrowed and paid back, in full, over a series of monthly payments.

All loans involve borrowing money from a lender and then using a payment plan to return the original sum of money, plus interest.
Most loans qualify as either an installment loan or a revolving line of credit.

A revolving line of credit allows borrowers a set limit that can be paid back and re-used over time (like a credit card).

Deciding On An Installment Loan


If you’re “adulting” in today’s world, it’s hard to get around certain realities.

From parenting to full-time jobs, the world of adulthood isn’t for the faint of heart. And while everyday life in and of itself can get overwhelming, there are other aspects of adult life to worry about too, like politics, current events, insurance, and keeping up your credit score.

Increasingly, using credit is a crucial part of American life. Credit is necessary for just about any big purchase, such as buying a home or vehicle. And even if you don’t have to rely on credit for a big purchase, having a good credit score is often vital for renting an apartment or even scoring a job.

But with so many types of credit out there, how is a proper adult supposed to learn about them all?

Power Finance Texas has you covered, with a breakdown of the most common types of loans.

Today we’ll be teaching you everything you need to know about installment loans, which are likely the most popular form of loan out there. Read on to get the full scoop on installment loans, so you can determine if they’re right for you.

What Are Installment Loans Used For?

Installment loans are typically used to pay for items or services where the price is predetermined. Installment loans can also be used when one needs extra cash on hand. 

Some common examples of installment loans or how they can be used include:

  • Auto loans
  • Mortgages
  • Paying off medical bills
  • Having cash for the holidays

There are typically no restrictions on how an installment loan can be used.


Installment loans are commonly used in today’s society.

Some of the most common types of installment loans include:

  • Auto Installment Loans
  • Personal Installment Loans
  • Mortgage Installment Loans
  • And many more examples

These loans are usually meant to finance a large purchase, but they can also be used for debt consolidation, building credit, or for smaller expenses.

What Is the Difference Between an Installment Loan and a Mortgage?

While both utilize installed payments, a mortgage can sometimes come with a variable interest rate rather than a fixed one. This means the interest rate will fluctuate over time as the market rates change. Also, mortgages almost always require a down payment on the home of three to twenty percent of the home’s value.

What Is the Difference Between an Installment Loan and a Personal Loan?

An installment loan is a type of personal loan that is paid back over an agreed period of time in regularly installed payments. Installment loans are distinctly different from other types of personal loans, such as payday loans that need to be paid back in a lump sum on an agreed-upon date. However, like other personal loans, you can also pay back installment loans early.

What Is Not An Installment Loan?


    • Payday loan: the type of loan that needs to be paid back all at once in a lump sum, like a payday loan.
    • Credit cards: do not qualify as installment loans either because they’re based on a revolving line of credit.

How Does an Installment Loan Work?

Installment loans always have clear terms for borrowing and include a contract to lock into those terms. Such terms include interest rate, loan duration, and penalties for late payments.

These terms differ depending on the lender and type of loan. The terms are also often determined by the credit score or financial history of the applicant. The amount of money being borrowed and the security of the loan will also affect the terms.

For example:

Most personal property loans offer lower interest rates since there is valuable collateral involved (like a house or car).

Qualifications & Requirements

So how do you know if you’re eligible for an installment loan? The specifics may vary depending on the lender, but generally, most installment loans require:

  • You must be at least 18 years old.
  • You must have a steady source of income.
  • You must live in the state in which you’re applying for a loan.
  • You must provide your Social Security Number and other identification.
  • You must have a checking or savings account.

Are Installment Loans Based on Credit?

Not only are installment loans based on credit, credit scores can largely affect your interest rate or even prevent you from getting a loan in the first place. If you have struggled with credit and currently have a low credit score, it is likely you will have to pay a higher interest rate than those with great credit scores.

installment loan Application Process

If you’ve determined that you’re eligible for an installment loan, it’s time to start the application process.

You can begin shopping around online (Power Finance Texas offers you the opportunity to apply online) or go to your local bank or credit union to inquire about their installment loan options. It’s smart to check out a variety of options and compare them to one another before you settle on the right contract for you.

1) Applying for the Loan

Once you’ve decided on the lender you’ll be working with, you’ll fill out the application and provide all the necessary qualifications. The lender will take some time to review your loan documents and review your credit score. Some lenders may have this information back to you within hours, and others may take a few days or even a week. (If you’re in a hurry to get the loan, be sure you ask about the turnaround time before you begin the process!)

2) Getting Your Money

money-spreadout-on-envelopeAfter reviewing your application and documents, the lender will come back with a loan offer and contract describing the terms. This is the time to carefully weigh the pros and cons of the particular agreement, as there are usually penalties for backing out of a loan after signing a contract.

If you agree to the terms, you’ll sign the loan and wait for the loan to be processed within a day or two. Once the contract is processed, you’ll likely receive a deposit of the lump sum straight into your bank account, and start paying off the loan as stated in the details of your contract.

Calculating an Installment Loan

For Example:

Let’s say you borrow $1,000 at an interest rate of 15 percent over 24 months.

Divided over the dictated time period, your payment would be $48 per month.

This total would come out to $1,164, meaning you’ve paid $164 in interest for access to the $1,000 you did not have upfront before getting the loan.

The lower the interest rate and the shorter the term, the less interest you’ll accrue over time. For example, if you borrowed that same amount at a 5 percent interest rate, you would only be paying $53 in interest, saving you more than $100.

Though that may seem inconsequential on a small loan of $1,000, think of how these savings compound when you’re borrowing a much bigger chunk of cash!

Pros & Cons

Now that you understand the basics of what an installment loan is and how it works, you may be weighing the pros and cons of applying for such a loan. Here are some aspects to consider:

Advantages of Installment Loans

The most obvious benefit of an installment loan is that it allows you to make a purchase you may not have otherwise been able to make if you needed all the cash upfront.

  • Wide Variety of Contracts: You’re also likely to find an installment loan with terms that work for you. If you need more time to pay off a loan, you’ll probably be able to find a lender willing to write a contract to meet your needs.
  • Manageable Payment Plans: This will allow you to whittle down the debt into small, manageable chunks of money over time. As long as you can afford the loan, you’ll be in good shape to secure the purchase you’re after and establish good credit along the way.

Disadvantages of Installment Loans

As with all loans, there are some drawbacks to consider when determining if an installment loan is right for you. First of all, you want to make sure you’re working with a fair and reputable lender. Some contracts indicate severe penalties if you miss a payment, so you want to be sure you know what you’re getting into ahead of time.

  • Accruing Interest: Installment loans also mean you’ll be collecting interest along the way. The longer it takes you to pay off the loan, the more interest you will owe. This is why it’s best to find a low-interest rate to help you minimize the total cost of the loan.
  • Penalization: Some lenders may penalize you if you pay off your debt earlier than agreed in the contract. Since interest is accruing every month it takes to pay off the loan, it’s wise to pay off the debt as fast as possible. But be sure to read the fine print and avoid a loan that penalizes you for prepaying your monthly dues.


Installment loans are an excellent option for many situations. If you’re looking to make a worthwhile purchase that will benefit you in the long run, e.g. going to college or buying a home, an installment loan is a great way to fund the cost. To determine if this is a good option for you, you first want to make sure the cost of the loan is manageable with your given budget. Start researching loan options and consider:

  • Interest rates
  • Loan term
  • Frequency of payments
  • How soon you’ll get the loan
  • Penalties, fees, restrictions, etc.

If you’ve done the calculations and find the loan to be a worthwhile option, go for it! Just be sure to find a reliable lender and understand all the implications of the loan. Don’t be afraid to ask lots of questions before committing to a loan.

What Happens If You Pay Off an Installment Loan Early?

If you pay off an installment loan early, you may be subject to a prepayment penalty. Some lenders implement such penalties to make up for lost interest if a loan is paid off too early. There are typically limits on how large prepayments can be and in some states, lenders that are regulated by state law are banned from incorporating these penalties.

While paying off an installment loan early shouldn’t hurt your credit, it probably won’t help it either. This is particularly true if you have only paid the first few installments on your loan.

Do Installment Loans Help Your Credit?

An installment loan can help your credit if you consistently pay on time. It can also help diversify your credit mix if all you have is credit cards. Using an installment loan to pay off a credit card can improve your credit by lowering your utilization ratio (how much credit you’re using compared to what you have available). 

Get Your Installment Loan

Hopefully, we’ve answered all of your questions as to what an installment loan is, as well as provided a good overview of the benefits of installment loans, from the qualifications to the application process.

If you need cash or funds, apply for an installment loan from Power Finance Texas today. We offer plenty of flexibility in how you pay off your loan and always strive to ensure your experience is a good one. Click on the button below to apply.