Types of installment loans
Many different credit products fall under the umbrella of installment loans, but all involve a one-time disbursement of funds and repayment in installments. Some common installment loans include mortgages, auto loans, personal loans and buy now, pay later (BNPL) loans.
Mortgages
A mortgage is a secured installment loan that lets you purchase property, with the property functioning as collateral. You may come across mortgages with a fixed or variable interest rate. Borrowers typically repay mortgages over the course of 15 or 30 years.
Eligibility and loan terms are subject to the borrower’s credit score and income. The property’s appraised value may also factor into a lender’s decision.
Auto loans
Auto loans are secured installment loans where the vehicle you’re purchasing serves as collateral. You use the loan to pay for the car up front, then make monthly payments to repay the amount borrowed, plus interest. Auto loan interest rates are typically fixed.
Personal loans
Personal loans are typically unsecured installment loans that you can use to cover a variety of expenses, such as home renovations, car repairs and debt consolidation. Personal installment loans usually have fixed interest rates, and you repay the loan in monthly payments over a set term.
BNPL loans
BNPL loans are a type of installment loan that let you make a purchase and pay for it over a series of smaller, fixed payments. BNPL loans are often available at the point of sale, though your credit card may allow you to convert certain purchases to BNPL after the fact. BNPL loans typically come with short repayment terms ranging from a few weeks to a few months and may not charge interest.
Installment loan pros
Installment loans offer a few key benefits:
- Fixed monthly payments: Installment loans may come with fixed interest rates, which can mean your monthly payment remains the same amount for the life of the loan. This can help to make it easier to plan your monthly budget.
- Can have a positive credit impact: Paying back your loan according to the terms of your agreement may help boost your credit score over time.
- Refinancing opportunities: Qualified borrowers may be able to use an installment loan to refinance a higher-interest loan and potentially save money.
Installment loan cons
While installment loans can be a useful financial tool, here are a few things to consider before deciding whether one is right for you:
- Limited flexibility: Once you’ve borrowed the full amount of an installment loan, you can’t access additional funds. Unlike credit cards or lines of credit, you can’t simply borrow more money if you need it later – you’ll typically need to take out a new loan.
- Interest: If your credit score isn’t strong, you may be offered a higher interest rate, which can mean paying more over the life of the loan. Because most installment loans are longer-term, you may end up spending a significant amount on interest even with a favorable interest rate.
- Can have a negative credit impact: As with any loan or line of credit, missing payments on an installment loan can have negative consequences to your credit score.
How to apply for an installment loan
Since there are several different types of installment loans, the approval process can vary. For example, mortgages typically require you to have a home appraisal before you’re approved. Personal loans, by contrast, might only require you to fill out a short application with your personal details.
In general, here are the steps to apply for installment loans:
- Decide how much you need: This step might involve deciding how much you want to spend overall and how much you want to put into a down payment, as may be required for mortgages and some auto loans. Regardless of the loan type, you’ll want to do some math to figure out what your payments might look like with certain repayment terms. That may help you decide how much you want to borrow.
- Compare lenders: Once you know how much you intend to borrow, compare different lenders to find the best rate and terms. Some lenders may offer pre-qualification for certain types of installment loans, which can help you determine your eligibility and can give you an idea of your potential loan terms without affecting your credit score.
- Apply: After you’ve decided on a lender, the next step is to apply. Typically, you need to provide documents and information related to your credit and finances. If you’re approved, a lender will tell you what terms they can offer, and you can decide whether to move forward.
How do installment loans impact credit score?
Installment loans may affect your credit score in several ways. First, applying for an installment loan adds a hard credit inquiry to your credit report, which can have a small, temporary impact on your credit score.
If you take out an installment loan, that can help diversify your credit mix and may help increase your credit score. At the same time, adding a loan to your credit file will increase your amounts owed, which may negatively impact your credit score — though this will decrease as you pay off the loan.
The way you manage an installment loan is also a critical part of how it impacts your credit score. For example, keeping up with the payments can be beneficial to your credit score, while missing payments or having your loan go to collections can be detrimental. That’s why it’s vital to ensure you can afford the monthly payment for the full loan term before taking out an installment loan.
When should you consider an installment loan?
For a one-time expense with a clear cost, an installment loan may be a viable option if you can secure the funds you need at a reasonable interest rate and affordable monthly payments. Before you take out an installment loan, though, it’s important to consider your total costs, including interest and fees.
For example, Citi offers competitive, personal loans to qualified applicants. If you think you could benefit from a Citi® Personal Loan, apply online today.
Installment loans can help you bridge the gap between your current finances and your needs. Once you understand how to use them and weigh the pros and cons, you may decide if an installment loan makes sense for your situation.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
