Definition
An installment loan is a form of debt repaid over a specified period of time by making equal payments at scheduled intervals.
Analysis
Installment loans are commonly used in order to purchase a vehicle on credit. A borrower that repays an installment loan over 4 years would make 48 equal installments to repay the loan. The vehicle would serve as collateral for this type of installment loan.
An installment loan to purchase a home is called a mortgage. A mortgage loan of 30 years would require 360 monthly payments to repay the loan. The real property (home and land) would secure the loan.
Installment loans do not necessarily have to be secured loans. A bank, credit union or finance company may provide personal loans with no collateral requirements.
Installment loans follow repayment allocations as established by an amortization schedule, where interest payments are higher in the beginning of the loan. The total interest costs of an installment loan are expressed as an annual percentage rate.
