An "installment loan" is a broad, general term that refers to the overwhelming majority of both personal and commercial loans extended to borrowers. Installment loans include any loan that is repaid with regularly scheduled payments or installments. Each payment on an installment debt includes repayment of a portion of the principal amount borrowed and also the payment of interest on the debt.
Common examples of installment loans are auto loans, mortgage loans, or personal loans. Other than mortgage loans, which are sometimes variable-rate loans where the interest rate changes during the term of the loan, nearly all installment loans are fixed-rate loans, meaning the interest rate charged over the term of the loan is fixed at the time of borrowing. Therefore, the regular payment amount, typically due monthly, stays the same throughout the loan term, making it easy for the borrower to budget in advance to make the required payments.
Some installment loans (often referred to as personal loans) are extended without collateral being required. Loans extended without the requirement of collateral are made based on the borrower's creditworthiness, usually demonstrated through a credit score, and the ability to repay as shown by the borrower's income and/or assets. The interest rate charged on a non-collateralized loan is usually higher than the rate that would be charged on a comparable collateralized loan, reflecting the higher risk of non-repayment that the creditor accepts.
A borrower applies for an installment loan by filling out an application with a lender, usually specifying the purpose of the loan, such as the purchase of a car. The lender discusses with the borrower various options regarding issues such as down payment, the term of the loan, the payment schedule, and the payment amounts.
Installment loans are flexible and can easily be tailored to the borrower's specific needs in terms of the loan amount and the length of time that best matches the borrower's ability to repay the loan. Installment loans let the borrower obtain financing at a substantially lower interest rate than what is usually available with revolving credit financing, such as credit cards. This way, the borrower can keep more cash on hand to use for other purposes, rather than making a large cash outlay.