What Is An Installment Loan and How Does It Work?

When managing big expenses or working toward financial goals, it's important to consider your loan options. Whether you are planning to remodel your home, buy a car, or consolidate debt, an installment loan can offer a flexible and predictable way to borrow money. But what are installment loans and how do they work? This guide will break down everything you need to know about installment loans. Plus, learn how to find the best loan and compare loan options.

What is an Installment Loan?

An installment loan is a borrowing category where you repay a loan over time with scheduled, consistent payments (a.k.a. installments). Unlike a credit card, where your balance changes monthly, installment loans give you a fixed loan amount and interest rate with clear repayment plans.

A key feature of installment loans is consistency. Borrowers know exactly how much they owe each month and how long it will take to fully repay the loan. This predictability makes installment loans a popular choice for funding large expenses, emergencies, and reaching your financial goals.

Plus, an added benefit of installment loans is their flexibility—they can be used for many different purposes. Here’s an overview of common installment loan types:

• Personal Loans
• Auto Loans
• Mortgages
• Student Loans
• Home Equity Loans
• Debt Consolidation Loans
• CD Term Loans
• Business Loans
• Construction Loans

Each loan here has a special purpose, but they all share the same installment structure. (Learn about another lending structure in our recent article about revolving credit).

How Installment Loans Work:

Installment loans are simple and easy to understand. Here’s a step-by-step breakdown:

1. Borrow Fixed Loan Amounts

When you take out an installment loan, you get the entire amount upfront. Whether it’s $5,000 or $500,000, you receive the full loan to use as needed,

2. Set Repayment Terms

Next, you choose the loan term. This is the amount of time you have to pay back the loan. Terms can range from a few months (for smaller loans) to 30 years (for mortgages).

3. Apply Interest

After you settle on the loan amount and terms, the lender will apply an interest rate. This is the cost of borrowing the money, and it’s usually shown as the annual percentage rate (APR). Your rate depends on things like credit score, the size of the loan, and how long it takes to repay.

4. Your Payments Stay Consistent

Every month, you make a fixed payment that covers both the loan principal (the amount you borrowed) and the interest. This consistency makes budgeting easier—no guesswork involved! If you want some extra help, we suggest using a Loan Amortization Calculator to calculate your monthly payments.

5. Loan Is Paid Off Over Time

By making regular payments on time, you will gradually reduce the outstanding balance of your loan. Once all the payments are made, the debt is fully repaid.

BONUS CONSIDERATION: Refinancing? It’s an Option

If you are currently repaying an installment loan while market interest rates change, you might be able to refinance and save money. Refinancing allows you to replace your current loan with a new one, often with better terms and interest rates.

Find the Best Installment Loan at Academy Bank:

Installment loans can work wonders for managing life’s big (and small) financial needs. They offer predictability, versatility, and the opportunity to plan your budget effectively. Plus, with so many installment loans available, you will certainly find the perfect match.

Let Academy Bank be your lending partner! We simplify the borrowing process for our clients, making it easy to pinpoint the right financial solution. Our installment loan products include:

• EXPRESS LOAN: Our flexible personal loan option for a wide range of expenses, including medical bills, debt consolidation, home improvements, and more.
• CD TERM LOAN: Borrow against your existing certificate of deposit without facing early withdrawal penalties.
• MORTGAGES: Explore a variety of home loan programs from Academy Bank: FHA Loans, Jumbo Loans, Conventional Loans, VA Home Loans, and special mortgages for professionals.
• BUSINESS LOANS: Want to supercharge your business? Consider a Business Term Loan, C&I Loan, HOA Loan, or a SBA Loan for small business.

Ready to take the next step? Whether you are on the hunt for the best personal loan, looking to kickstart entrepreneurship with a SBA small business loan, or learning how to calculate a loan comparison rate, Academy Bank is here to help!

And don’t forget to take advantage of our special calculators for evaluating different loans: Loan Comparison Calculator and Mortgage Rate Comparison Calculator.