What is an installment loan?

January 27, 2023

3 min read

If you’ve ever had to shop for a loan, you know that the vocabulary can be confusing. In this post, we will explain how an installment loan works.

Let’s first consider a situation: It’s summertime, the temperatures are hitting triple digits, and the air conditioner in your car is broken. You work hard, but just don’t have the $1,000 needed to fix it right now.

Given this problem, personal installment loans could be a responsible option.

Here’s what we’re going to cover:

How are installment loans useful?
How does a personal installment loan compare to other financial products?
Oportun: Affordable lending options designed with you in mind

Key takeaways

The term “installment loans” is a generalized phrase referring to many popular loan options offered by lenders.
Installment loans are defined by the way borrowers are expected to pay off these loans—incrementally and over time.
Installment loans differ from other financial products like payday loans and credit cards with regard to payment cycles and interest rates.

How are installment loans useful?

Installment describes how a loan is repaid. Installment loans are paid back over a set period with regularly scheduled payments, usually of an equal amount. The lender and borrower agree to the time period, frequency of payments and amount before making the loan.

Following the example above, if you borrowed $1,000 using an installment loan, you might have a set repayment period of 9 months and payments due every two weeks. Payments include principal and interest.

Set period: 9 months to repay the loan

Payment schedule: Every two weeks

Payment amount: Pre-determined, typically equal payment amounts

How does a personal installment loan compare to other financial products?

Payday loans

For comparison, a payday lender might only be able to give you $300 that you would need to repay in full, plus interest, in two weeks. You must repay it all at one time. You do not usually get to make partial payments, and if you can’t pay it all back on the due date, you might be rolled into another payday loan, and another one, until you’ve paid it all off. And since you need $1,000, you may even have to get multiple payday loans.

Credit cards

Another comparison, $1,000 on a credit card means you only have to make a minimum payment, say $50, each month, which can vary from month to month according to how much you owe. Payments are not fixed and can increase. The higher your balance, the higher your minimum payment. You will also accrue interest on the unpaid balances each month, which can add up quickly if you are only paying the minimum payment.

Oportun: Affordable lending options designed with you in mind

Now that you understand how installment loans work, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about: