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Editor’s Note: This story originally appeared on The Penny Hoarder.
An installment loan is a lump sum of money that you borrow and then pay back in fixed intervals. Installment loans are often used to finance a major purchase, like a house, car, or boat, or to finance an education, though you can get an installment loan for practically any reason.
If you’re wondering what an installment loan is, you’ve come to the right place. Learn more about how installment loans work, the pros and cons, and how to get an installment loan.
What Is an Installment Loan?
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An installment loan is a type of loan that lets you borrow money and repay it in equal monthly payments or according to another predetermined schedule. You pay back the principal loan amount, plus interest, in fixed monthly payments until you’ve paid back the loan.
Installment loans usually have a fixed interest rate that doesn’t change throughout the life of the loan. However, some installment loans, like private student loans, have a variable interest rate that can change while you’re paying back the loan.
Some installment loans also charge origination fees to process your application. Depending on the type of installment loan, you may owe prepayment fees if you pay off the loan early. But if you don’t make payments according to the repayment terms or you make late payments, you could incur additional fees and hurt your credit score.
Installment loans work differently than revolving credit, like a credit card. Revolving credit, like a credit card or a line of credit, allows you to borrow money and repay it over and over again, while you make payments on an installment loan until it’s paid off in full. Payday loans are also different from installment loans in that you repay a payday loan in a lump sum instead of fixed installments.
Types of Installment Loans
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Installment loans can be secured loans, which means they’re backed by collateral, or unsecured loans, which aren’t backed by collateral. Mortgages and vehicle loans are two types of installment loans that are secured. Examples of unsecured installment loans include student loans, personal loans, and debt consolidation loans.
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A mortgage loan is one of the most common types of installment loans that are used to purchase a house, condo, or land. Most mortgages are repaid at fixed interest rates over periods of 15 years or 30 years. Your home is the collateral on a mortgage, so if you fail to make payments, …….