What Is an Installment Loan?

An installment loan lets you borrow a set amount that you repay with interest over a period of months or years.
Annie Millerbernd
By Annie Millerbernd 
Edited by Kim Lowe

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An installment loan is a common type of loan that’s used 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.

Here’s what an installment loan is and what to know about these loans before you borrow.

How installment loans work

An installment loan is a lump sum of money that you borrow and repay in regular payments — or installments — over a period of time, usually months or years. Installment loans can be secured with collateral, like a car, or unsecured.

Installment loans work differently than revolving credit — which you get with a credit card or home equity line of credit — because you borrow the funds all at once. You can’t get more money without applying for a new loan. And installment loans give you time to repay the loan, unlike payday loans that require full repayment from your next paycheck.

Examples 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 6% to 36%. Use an installment loan calculator to see how the loan's rate and repayment term affect the monthly payment.

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, but some lenders let borrowers use savings account or vehicle as collateral for the loan to qualify for a lower rate.


With a mortgage, you borrow the value of the house and agree to repay it with interest in monthly increments, typically over 15 or 30 years.

In this case, the installment loan is secured by the home. After too many missed payments, you risk losing it.

A home equity loan — which is a second mortgage you might take to pay for home improvements — is also an installment loan.

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 five 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, though, and 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 at-checkout 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.

How an installment loan affects your credit

Applying for an installment loan often requires a hard credit check, which can temporarily lower your credit score by a few points. Beyond that, installment loans can strengthen your credit if you make 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 build that history.

The consequences for missed or late payments can be severe. A payment that’s 30 days or more late can knock up to 100 points off your credit score. Most lenders allow borrowers to set up automatic payments, which removes the pressure of remembering to pay.

Pros and cons of personal installment loans

Personal installment loans can make large purchases more manageable, but it’s important to weigh the pros and cons of installment loans alongside other financing options to choose the right one for your plans.



You can pay off a large purchase over time.

If you don’t borrow enough, you can’t easily borrow more.

Fixed-rate loans have predictable payments.

Interest rates may be high, especially if you have a low credit score.

On-time payments build your credit.

Missed payments can hurt your credit score.

You may be able to refinance for a better interest rate or loan terms.

Repayment terms can be long, leading to high interest costs.

How to get an installment loan

  1. Compare. Lenders use different methods to assess your loan application and assign your rate, so it pays to compare installment loans from multiple lenders. Also consider other forms of financing, like low-interest credit cards or lines of credit, especially for big expenses.

  2. Pre-qualify. Get pre-qualified for a personal loan or preapproved for a mortgage to see your potential loan amount, rate and monthly payment without affecting your credit score. You can then assess how the payments impact your budget.

  3. Boost your application. Before you apply, consider a joint or co-signed loan or secure an unsecured loan with collateral. These options may help you qualify or get a lower rate or higher loan amount. Just know there are consequences if you're unable to repay the loan: your co-signer will be on the hook or the collateral could be taken.

  4. Apply. Installment loans are offered at banks, credit unions and online lenders. The time required to apply varies by loan type and lender.

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

Personal installment loans for bad credit

Borrowers with thin or imperfect credit profiles may still be able to get an installment loan with bad credit (a credit score below 630). 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.

High-cost unsecured installment loans

Lenders must disclose a loan’s annual percentage rate (interest rate plus all other fees), and personal finance experts say 36% is the maximum APR an affordable loan can have.But you’ll find some 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 at best too expensive and at worst predatory.

Frequently asked questions

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.

Personal loans are installment loans. In both cases, you get a chunk of cash all at once, and then repay it over a few months or years. Personal loans are just one type of installment loan. Others include auto loans, student loans and mortgage loans.

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

Comparing options? See if you pre-qualify for a personal loan - without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

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