How Do Installment Loans Work Exactly?


Total household debt in the United States has risen to over $16 trillion. Amidst inflation and the economic tumult brought by the COVID pandemic, people are looking for the best ways to handle debt. This has given rise to personal installment loans. You may be wondering, “How do installment loans work?” That is a very good question, especially if you want to determine if a personal installment loan is the best option for you.

The information below covers the basics of installment loans, with a deeper dive into personal installment loans. Keep reading to find everything you need to know to make the best decision about your financial future.

How Do Installment Loans Work?

Any loan that you pay off over a period of time through regular (usually monthly) installments is considered an “installment loan.” Common ones include mortgages as well as student, personal, or auto loans.

When looking at how do installment loans work, there are three main components to look at. The borrower and the lender must agree to each of these:

  • The amount borrowed
  • The amount of time it will be paid back
  • The interest rate

Each of these is determined by the borrower’s credit score. They all must be agreed upon by the borrower and the lender. Note that other fees, like application fees or late payment penalties, could be added to your monthly installments.

While repayment of installment loans requires a monthly minimum payment, there are some small variations in how this is done. With most loans, this involves payment on the aggregate principal and the amount of interest for that period.

You can almost always pay more on the principal without penalty (although, you be clear about this from the outset), although you may have to specify that when making the repayment.

Installment Loans Advantages

There are many installment loan benefits. One is flexibility.

Most installment loans are often referred to as “installment credit.” When you take out such a loan, you receive the full amount upfront. In the case of a home or vehicle, you “possess” the item, then begin paying it back in monthly installments.

This one-time purchase makes these loans distinct from revolving credit, which can use repeatedly and pay down as you see fit. Most often installment loans include interest, but not always.

The flexibility in the purpose of installment loans is not the only advantage. The predictability of regular repayments is another one. It allows you to budget for how you will repay the amount without the threat of surprises from the lender.

A final advantage of installment loans is the ability to refinance. For instance, if your credit score improves or interest rates fall, you may have the chance to refinance the amount. This could lower your monthly minimum payments or shorten the amount of time you will be repaying the loan.

Secured vs. Unsecured Installment Loans

There are different installment loan options. Most are “secured loans,” or tied to an asset that can be repossessed should the borrower default on the loan. This is the case with mortgages and auto loans. Secured loans tend to have lower rates due to this collateral.

Unsecured loans, on the other hand, lack collateral, which makes them more precarious for the lender. They could carry higher interest rates, but not always.

Federal student loans, for instance, are “unsecured” (the government will not come to take your diploma away if you fail to pay them) but tend to have interest rates on par with many secured installment loans.

What Are Personal Installment Loans?

A personal installment loan (PIL) is an unsecured loan that individuals or families can take out for any number of purposes. This can include paying off medical debt, making home improvements, getting needed vehicle repairs, or consolidating high-interest credit card debt. The high flexibility of the loan makes it very appealing to a lot of borrowers.

Most PILs are between a few hundred dollars and $5,000. Although, they could be more, depending on the lender and the purpose of the loan.

Since PILs are unsecured, they will likely carry a higher interest rate than a mortgage or auto loan. However, lenders try to keep rates down to make them an appealing option for covering some of the expenses noted above.

Personal Installment Loans vs. Payday Loans

It is important to distinguish between personal installment loans and other types of personal loans. These include title loans, payday loans, and pawnshop loans.

Each of these is considered predatory by the National Association of Consumer Advocates. While they may seem enticing in emergencies, these types of loans come with many severe consequences.

Title loans, for instance, permit the lender to repossess your vehicle or home, if you cannot make payments. While that may seem innocuous for someone who feels confident that they can make payments, it is not worth the risk.

Payday loans, which are an advancement on your paycheck, tend to carry extremely high interest rates, much greater than many credit cards. Sometimes these lenders require borrowers to give them their bank information for automatic withdrawals for repayment. This can lead to overdraft fees or even more nefarious activity on your account.

Finally, the companies that make these types of loans are focused on debt collection. For this reason, they may sell your loan to another collector. These agencies may harass you if you do not make repayment.

PILs, on the other hand, are made by reputable institutions that you can trust. They are a safe and secure way to handle debt, without the negative repercussions associated with these other types of loans.

Learn More About Installment Loans

Now that you have an answer to the question “How do installment loans work?” you can decide if a personal installment loan is the right option for you. It can be a useful tool for paying off debt or taking care of costs associated with an emergency. Be sure to go with a reputable lender that has reasonable interest rates and is upfront about all fees and repayment plans.

Kingcash is a financial services company that offers an alternative to loans from classic financial institutions. Getting approval is fast and easy. Apply online or reach out to us today to learn more about our services.

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