Installment Loan - The Types and Advantages

Installment loan is a consumer loan in which principal and interest are paid off through equal monthly payments.

Installment loans are generally taken to purchase home, car, furniture etc. The loan comprises of specified amounts that are to be repaid over a predetermined repayment period. The payments can include both the principal and the interest or it may contain only the interest amount with the principal being paid in a lump sum amount with the final loan installment.

Installment loans are available in the market as:

• Unsecured loans:
  These loans are riskier for lending institutions and are hence available at higher rate of interest. The loan is available only if the borrower has a good standing in terms of credit score, payment history and job status. Example; Personal loans, student loans, etc.
  
  
• Secured loans:
  These loans are offered by the bank or a financial institution against collateral. The bank can even sell the property if the loan isn't paid back. The interest rates for secured loans are comparatively lower than unsecured loans. Example; mortgage home equity loan, home equity line of credit are secured loans.

Why borrowers prefer Installment loans

There are certain advantages of dealing with installment loans which makes them a preferable choice.

• Borrowers are aware of the amount of monthly payment that they have to make and the time period allowed to pay off the loan. So they can take the right financial move by planning a proper budget.
  
  
• Installment loans have extremely competitive rates which vary in the 5 to 7 percent range.
  
  
• Repaying an installment loan includes interest payments and after a certain period, an increasing portion of principal amount is also paid back. This helps in steady reduction in the principal amount during the loan term.