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How Does an Installment Loan Work Exactly?

Americans carry over $14 trillion dollars in debt.

There are many types of loans that people can take out that contribute to this debt. Some are for specific purposes, while others are more general and you can use the money how you please. 

Loan products work in different ways. For example, credit cards are a type of revolving credit whereas an auto loan is a type of installment loan. How does an installment loan work? That’s what we’re going to dig into here. Check it out!

What Is an Installment Loan?

Installment loans go by many names — mortgages, car loans, student loans, personal loans, and more. 

Understanding how installment loans work is quite simple. They get the name because you take out a lump sum and then pay it back in installments over a period of time. Your payment is set at a certain amount each month and you keep making payments until you pay off the loan.

This is different from credit cards where you can keep taking out small amounts and either pay in full each month or make smaller payments. As long as you make the minimum payment you don’t get in trouble, but you do pay a lot of interest. 

Smaller installment loans, like personal loans up to $5,000, are easy to get online through a lender like The process is quick and you can usually get approval in minutes after filling out a simple application. 

Benefits of Installment Loans

With a set repayment period and monthly payment amount, consumer installment loans can offer lower interest rates than credit cards. The higher your credit score, the lower an interest rate you’ll pay. 

Some installment loans come with built-in collateral, like a home loan, or you can offer collateral. Collateral is an asset that the lender can seize if you default on the loan. This lowers their risk, allowing them to lower your interest rate even more.

If you’re having trouble with high credit card balances, one option is to take out a debt consolidation loan. This is an installment loan that you use to pay off your high-interest credit cards. Afterward, you make payments on this lower-interest loan to finally clear your debt. (As long as you don’t keep charging those credit cards, that is.) 

Generally, even if you have poor credit, you can work with a lender to take out an installment loan. Keep in mind, however, that your interest rate will be a bit higher. You can also use installment loans to help boost your credit score by making on-time payments in full. 

How Does an Installment Loan Work? It’s Simple!

So how does an installment loan work, exactly? We hope this quick crash course answered your main questions. As usual with loan products, installment loans can be a helpful financial tool if used correctly. While it’s harder to get in trouble with installment loans than with credit cards, you should still be vigilant in how you use these so you don’t get in over your head.

Looking for more great advice? Check out more articles on our site!

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