Are you wondering whether to take out an installment loan to finance your next big purchase? If so, you aren’t alone! Americans have more than $115 billion in personal debt and many of this is financed through installment loans.

Before you take out a loan and pay it back in installments, you need to know what these loans are and how they can impact your credit.

Read on to learn the answer to the question: “What are installment loans?”

Explaining Installment Loans

An installment loan is one of the most popular forms of financing because it helps someone buy something they may otherwise not be able to pay for without assistance.

Let’s illustrate a textbook example of an installment loan definition. When you go to buy a car, you may not have or want to pay-off the total purchase price of the vehicle. Instead, you may choose to take out a small loan to finance the purchase.

While the loan is outstanding, you would repay the debt in monthly installments while the creditor has a secured interest in your vehicle. If you don’t make timely payments under the loan terms, the creditor may have the right to repossess your vehicle.

Important Terms in an Installment Loan

Installment loans exist for many different purchases but each of these agreements has the same general guidelines. In each loan, there will be a principal amount along with an interest rate and a term for repayment.

Your interest rate may be fixed (meaning it never changes) or variable (meaning that it can change at different points in time by the happening of certain events). It’s important to pay attention to how you will be charged interest during your loan term.

The Most Important Benefits

Some important benefits exist with installment loans that are good to know before you sign your name to an agreement. These include high credit limits, fixed interest, and predictable payments.

While many credit cards may limit your credit limit to $10,000 or less, an installment loan could be for much more money. For example, you may receive a large installment loan from a bank to finance a new home.

Most of the time, an installment loan will have a fixed rate of interest. This will help you to know what it will cost to borrow the money to finance your purchase.

Installment loans allow you to have predictable payments from month-to-month. In the example of a mortgage with a fixed rate, you will know what you are paying every 30 days!

Wrapping Up: ‘What are Installment Loans?’

When you ask, ‘What are installment loans?’, the answer may have been surprising to you. These loans allow you to finance large purchases like vehicles and homes but they can also be used to finance smaller purchases so you keep your cash available.

Are you interested in learning about other helpful personal finance tips and tricks? Check out our blog post section to read about useful information to put to use in your life today!