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What Is an Installment Loan?

An installment loan refers to a loan in which the repayment involves several payments. The overall amount that is owed is broken down into a number of smaller payments that are to be given over a determined period of time. The main thing about installment loans is that usually, the interest is already calculated in the payments. As a result, each payment is usually of the same amount over the entire period of the loan.

One common example of an installment loan is when you purchase a car. At the outset, the total price of the car is identified. If you are going to pay for car in installments, the interest is calculated and tacked on to the total amount that you have to pay. Now, depending on the number of years that you are going to pay for the car, the total amount will be divided to determine the amount of each installment. Each payment may be due every month, every quarter, or even every year, depending on the arrangement with the car dealer.

Installment loans can also apply to a pure cash loan which may not be associated with any specific purchase. The same idea applies - taking the total amount of the loan with the interest computed and spreading the payments over a predetermined period of time. The payments will follow a fixed schedule, and as time passes, the total amount owed will decrease as each payment is made.

As one can see, this kind of loan can be convenient to the borrower, especially if all the payments are made and not one is missed.

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