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An installment loan is a lump sum of money that you borrow in order to pay for a car, house or other large purchase. You may even have an installment loan that goes by another name, like a mortgage.
How installment loans work
You typically get an installment loan from a bank, credit union or online lender. After the lender approves your loan application, it transfers the borrowed funds to your bank account. Repayments start about 30 days after you receive the funds and continue in regular equal payments — or installments — over a period of time, usually months or years.
Installment loans can be secured with collateral, like a car, or unsecured. An unsecured loan isn’t backed by collateral that a creditor can seize if you miss payments, so approval is based primarily on your creditworthiness.
Installment loans work differently than revolving credit, which you get with a credit card or home equity line of credit. Revolving credit lets you borrow up to a credit limit, repay that amount, then borrow again if necessary. With an installment loan, you borrow the funds all at once, and you can’t get more money without applying for a new loan.
Types of installment loans
Personal loans
Personal loans are installment loans you can use for almost any reason. Available loan amounts range from $1,000 to $100,000, and repayment terms are typically two to seven years. Rates are from about 7% to 36%.
A lender decides whether you qualify for a personal loan and at what rate using information like your credit history and score, income and other outstanding debts.
Unsecured personal loans are more common than secured personal loans. However, some lenders let borrowers use a savings account or vehicle as collateral for the loan to qualify for a lower rate.
» MORE: Check personal loan rates
Mortgages
With a mortgage, you borrow the value of the house, minus your down payment, and agree to repay the loan with interest in monthly increments. Mortgages are typically repaid over 15 or 30 years.
Mortgages are secured installment loans, backed by the home. Keeping up with monthly repayments is crucial to avoid the risk of losing your home.
A home equity loan, which is a second mortgage you might take to pay for home improvements, is also an installment loan.
» MORE: Compare today’s mortgage rates
Auto loans
An auto loan is another example of a secured installment loan. You borrow the cost of the vehicle and make monthly payments, plus interest, typically over two to seven years. If you miss payments, the lender can repossess your car.
Student loans
Student loans are installment loans because you pay them back in regular payments over time. They can have fixed or variable rates, depending in part on whether the loans are federal or private.
Student loans often include a period after you’ve borrowed the money when interest accumulates but monthly payments haven’t kicked in.
Buy now, pay later
The type of financing that “buy now, pay later” companies offer is technically an installment loan. BNPL lets you break a purchase into equal, often bi-weekly, payments. For example, if you split a $200 purchase into four smaller payments, you’d repay the loan in $50 installments.
» MORE: What is buy now, pay later?
Example of an installment loan
Suppose you need to borrow $10,000, so you apply for an unsecured personal loan. You’re approved for a loan with a 12% annual percentage rate (APR) and a 60-month term.
Your monthly payment will be $222.44, which you’ll repay in 60 equal installments. Overall, you’ll repay the $10,000 you borrowed plus $3,346.67 worth of interest over the life of the loan.
Use an installment loan calculator to see how different rates and repayment terms affect the monthly payment and total interest cost on an installment loan.
Try our calculator
Loan details
2026
Jan
Feb
Mar
Apr
May
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Jul
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Your loan estimate
Monthly payment
$212.47
Total principal
$10,000
Total interest payments
$2,748.23
Total loan payments
$12,748.23
Payoff date
03 / 2031
Show amortization schedule
Do installment loans affect my credit?
How installment loans can help your credit
- Consistent, on-time payments: Reputable lenders report on-time payments to the three major credit bureaus (Equifax, Experian and TransUnion). Payment history makes up 35% of your FICO score, and on-time installment loan payments help you build credit history.
- Diversified credit mix: Your credit score may also improve slightly if you take out an installment loan and you only have revolving credit accounts, like credit cards. Having a diversified mix of credit accounts is generally good for your credit score.
- Lower credit utilization: If you use an installment loan to consolidate credit card debt, your score may improve since you’ll lower your credit utilization ratio, which is the percentage of open revolving credit you’re using.
How installment loans can hurt your credit
- Hard check: Applying for an installment loan often requires a hard credit check, which can temporarily lower your credit score by a few points.
- New credit account: Getting an installment loan may also cause your score to drop slightly if it lowers the average age of your accounts.
- Missed payments: A payment that’s 30 or more days late can knock points off your credit score. The higher your score, the more damage missed payments will have.
Pros and cons of installment loans
Installment loans can make large purchases more manageable, but it’s important to weigh the pros and cons alongside other financing options to choose the right one for your plans.
Pros
Pay off a large purchase over time.
Fixed-rate loans have predictable payments.
On-time payments build your credit.
You may be able to refinance for a better interest rate or loan term.
May improve credit if the loan is used for debt consolidation.
Cons
Once you borrow, you can’t easily borrow more.
Interest rates may be high, especially if your credit score is low.
Missed payments can hurt your credit.
Repayment terms can be long, leading to high interest costs.
How to get an installment loan
- Check your credit. Borrowers with good or excellent credit (scores in the mid-600s or higher) are more likely to qualify for installment loans and get lower interest rates. Check your credit report and dispute any errors that may be bringing your score down. Work on building credit if you have time before applying for a loan.
- Pre-qualify or get preapproved. Get pre-qualified for a personal or student loan or preapproved for a mortgage or auto loan to see your potential loan amount, rate and monthly payment. This will help you assess how the payments would affect your budget. Pre-qualifying may not affect your credit score, but preapproval may require a hard credit check that causes your score to temporarily dip.
- Boost your application. If you’re having trouble qualifying for a loan with a low APR, consider a joint or co-signed loan. You could also ask about whether you can secure an unsecured loan with collateral. These options may help you qualify or get a lower rate. Just know there are consequences if you're unable to repay the loan: Your co-signer will be on the hook, or your collateral could be taken.
- Apply. When you formally apply, the lender will do a hard credit check if they haven't yet. The time required to apply and receive funds varies by loan type and lender.
Getting an installment loan with bad credit
Borrowers with thin or imperfect credit profiles may still be able to get an installment loan with fair or bad credit (a credit score below the mid-600s).
Some lenders have lower credit score requirements and consider other information, like bank account transactions, employment, education and existing debts. Credit unions and online lenders may work with bad-credit borrowers, while banks tend to require good or excellent credit.
What to know about high-interest installment loans
Lenders must disclose a loan’s annual percentage rate (interest rate plus all other fees). Personal finance experts say 36% is the maximum APR an affordable unsecured personal loan can have — but some lenders offer installment loans with rates of 100% or higher.
Lenders that offer high-interest installment loans may not review your credit and ability to repay, and they don’t always report on-time payments to the credit bureaus. These are red flags that signal the loan is likely too expensive or even predatory.
Note that some high-interest loans, like payday loans, usually aren’t installment loans. Payday loans have low borrowing limits (often $500 or less) and an average APR of 391%. These loans usually require full repayment within two weeks, whereas you repay an installment loan over several months or years.
Frequently Asked Questions
What is an example of an installment loan?
A loan that you get in a lump sum and repay over time is an installment loan. Here are a few examples:
- Personal loans.
- Auto loans.
- Student loans.
- Mortgage loans.
What is the difference between a personal loan and an installment loan?
Personal loans are a type of installment loan. While some installment loans, like a mortgage or student loan, are used for a specific expense, you can use a personal loan for most purposes. Personal loans provide a lump sum of cash, and you repay it over several months or years. .
How much would a $5,000 installment loan cost per month?
The monthly payment on a $5,000 installment loan will vary based on the loan’s APR and repayment terms. Let’s say, though, that you’re borrowing $5,000 at 12% APR over 24 months. Your monthly payment would be $235.37. You’d repay a total of $5,648.82 between principal and interest over 24 months.
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