Installment loans are accounts that are designed to start out with a certain amount owed and with the goal of bringing the account total down over time. These are considered distinct from what are called revolving accounts, such as credit cards, where there is an upper limit that the borrower can continue to borrow against as long as they stay current with payments and do not exceed the limit. The installment and revolving structures represent a large amount of the world's credit, and charge cards and service credit accounts represent most of the balance.
Examples of Installment Loans
Many common financial vehicles are commonly developed and managed by installment loan lenders. If you've ever known anyone who has had a mortgage or taken out a car loan through a bank, then you're likely familiar with the rough idea of installment loan services. Similarly, student loans are based on the installment model. Personal loans issued by banks are also installment loans, although some may be considered private equity, depending on how they're structured.
A major distinction between installment loans and other kinds is that payments are intended to be set amounts paid on consistent schedules. You may need to pay, for example, $350 a month to keep up with payments on your student loans. Installment lenders are also supposed to allow early payment with penalties, but you should always read the fine print of an agreement to ensure that it conforms to these rules and isn't a different kind of financial vehicle.
You'll note that many of the common types of installment loans are in some way backed by something tangible. A mortgage is backed by the house itself, as is the case with a car loan. Many types of student loans are backed by guarantees from the government, and others may be backed by promises from cosigners.
A big part of setting up an installment structure is getting an interest rate that's favorable. Putting down a large percentage of the total loan as a down payment, such as 20% on a mortgage, is a good way to get a lower rate. This lets the bank know you have a lot of skin in the game, increasing the chances you'll make sure to pay the full amount. The term of a loan is also a factor, with shorter loans generally having lower rates. Creditworthiness is a factor, too.