What is an Installment Loan?

• An installment loan provides qualified borrowers with a lump sum that can be used to fund various purchases. 

• There are many different types of installment loans, including personal loans, student loans, and home mortgages.  

• Installment loans generally charge interest and are repaid gradually through a scheduled series of payments. 

• Every installment loan is subject to unique terms and conditions, so it’s important to compare your options carefully before you apply. 

An installment loan is a flexible form of financing that provides a lump-sum payment that can help cover major expenses, like college tuition or vehicle repairs. The borrower repays this loan over time in a series of bite-sized installments. 

Let’s take a closer look at how installment loans work, including some common examples of different types.

If you meet the lender’s eligibility criteria for the loan and agree to the terms and conditions, you’ll be approved for a specific amount to fund a purchase, such as a vehicle or new furniture. You repay the loan based upon terms and conditions, paying in installments over time until the loan is paid in full. Some loans carry high interest rates while others are interest-free, making it important to understand the terms and conditions of your loan and your responsibilities.

There are many different types of installment loans, with some of the most common examples including student loans, mortgages, auto loans, and personal loans. The most appropriate installment loan option for you depends on your financial goals, credit history, and what you plan to purchase.

Personal loans

A personal loan is a type of flexible installment loan that, unlike an auto loan or mortgage, can be used to make many different types of purchases. Some examples of payments or purchases that you can make using a Zip personal loan include auto repairs, household bills, and unpaid debts.

Mortgages

A mortgage is an installment loan specifically for purchasing a home. The loan is secured by the house, which means missed payments can potentially lead to loss of the property. Mortgages are long-term installment plans that typically last from 10 to 30 years, and are generally paid on a monthly or biweekly basis.

Auto loans

An auto loan is an installment loan that helps you pay for a vehicle. Similar to how a mortgage loan is secured by the house, an auto loan is secured by the vehicle, making it vital to stay on top of payments. Auto loan payment plans can last anywhere from 12 months to more than 90 months, but more commonly range between 24 and 84 months.

Student loans

A student loan is a type of private or federal installment loan that provides funding for higher education expenses, such as college tuition, student housing, meal plans, or school supplies like textbooks, computers, and program-specific equipment. Student loan repayments can be delayed or deferred depending on the borrower’s financial circumstances.

Buy now, pay later loans

Buy now, pay later (BNPL) services like Zip have soared in popularity over the past few years thanks to their flexibility, convenience, and ease of use. A BNPL loan provides instant funds at the point of sale, which is always in the form of a virtual card or digital wallet. With Zip, you pay a small portion of your item’s price at checkout — for instance, 25% of the cost — while your virtual card covers the rest of your purchase.¹  Then you repay the BNPL loan with a short series of installments that are typically interest-free during the loan period.

Learn more about how BNPL loans from Zip work.

There’s no official limit to how many installment loans you can have at one time. However, the amount you may qualify to borrow depends on a variety of factors like your income, credit score, and debt-to-income ratio. It can also be financially risky to take out more than one installment loan at once, because applying for certain loans – such as auto loans, private student loans, or a mortgage – can lead to hard credit checks that lower your credit score.

Installment loans can have both advantages and disadvantages.

Pros

• You can break large expenses down into small, manageable payments

• Installment loans can offer assistance when unexpected emergencies happen

• Payments follow a consistent, predictable schedule

• If eligible, you may be able to refinance your loan, which means you can make lower payments

Cons

• High interest rates with certain types of loans 

• Potential for hard credit checks and missed or late payments to negatively impact your credit score

Any type of installment loan has potential to negatively impact your credit if you miss a payment. Some lenders report any late or missed payments to the major credit bureaus. Fortunately, most lenders offer autopay features and payment reminders that can help you stay on track. By making consistent, on-time payments on your accounts that report to major credit bureaus, you can protect and improve your credit. It’s important to note that buy now, pay later loans do not report late payments or timely payments to credit bureaus. It’s also important to be aware that applying for certain loans can result in a hard credit inquiry, which temporarily lowers your credit score.

Zip’s pay in 4² and pay in 8³ installment plans are installment loans that limit customer payment plans to either 4² or 8³ installments and don’t charge any interest during the installment period. That means you can pay off your purchase quickly, avoid paying interest like you would with other installment loans, and maintain more control over your budget and spending habits.

Installment loans can empower you with more flexibility and control over your budget, especially when you need to make a major purchase. Before you apply, review the loan’s terms carefully to be sure you’re getting the best plan for your needs.