Installment credit is a type of loan that is paid back over a specified period of time in equal installments. It is also sometimes referred to as “term loan financing,” “open-end credit,” or a “personal loan.” The repayment plan is structured with a set schedule of payment dates and amounts, with a final due date for payment of the entire loan. This type of loan may be used for a variety of purposes, including buying a car or boat, financing home improvements, and obtaining other large purchases.
Installment credit is typically secured by collateral, such as the car or boat purchased with the loan. This provides an added layer of protection to both the lender and borrower, since if the borrower fails to make their payments on time, the lender can repossess the collateral as repayment.
Interest charged on installment loans is usually lower than those of credit cards, but they are still subject to market conditions and the terms of the loan. Typically, lenders look at a borrower’s credit score and ability to pay back the loan before deciding whether to offer an installment loan. Other factors may include income, current debt, and employment history.
What Are the Benefits of Installment Credit?
Installment credit offers many advantages. Most notably, borrowers have the opportunity to spread out their loan payments over time instead of having to pay back the entire loan in one lump sum. This allows them to better manage their budget and makes the loan more affordable.
For lenders, installment credit is typically less of a risk than unsecured credit cards. As mentioned, lenders typically require the borrower to secure the loan with collateral. If the borrower fails to make payments, the lender can recoup their losses by repossessing the collateral. With credit cards, lenders are often stuck with the unpaid debts if the borrower stops making payments.
The Bottom Line
Installment credit is a popular way to finance large purchases or investments. While there is interest charged for these loans, they typically offer lower rates compared to credit cards. They also offer the convenience of paying back the loan in equal installments over an agreed-upon schedule. Just be sure to read the terms of your loan before signing and make sure it’s the right fit for you.