What is Installment Credit?
Installment credit – another term for installment loan or installment debt – is a loan in which you make fixed installment payments toward over a set period of time. Mortgages, car loans, and personal loans are common types of installment credit. The term of the loan can be a few months up to 30 years like a mortgage.
Unlike payday loans (usually single payment or paid in a lump sum), short term loans, or certain credit cards, a loan application for installment credit may be more difficult to qualify for. Installment lenders may look at:
- Credit scores and previous credit inquiries
- Income and work history
- Personal identification
- Purchase data and other underwriting factors
- Collateral for the loan, such as the house or car
The approval process for installment credit can be as short as 1 day and as long as a week. There are home mortgages that take weeks to finalize due to unexpected issues that arise. But an installment loan with Possible Finance can take as little as a few minutes to apply for and get approved.
Important Terms to Know
Annual percentage rate – a percentage rate that reflects how much interest is charged annually over the full term of the loan
Origination fee – a fee charged by the lender when you enter into a loan agreement that’s usually used to cover loan processing fees
Principal – amount borrowed on a loan
Term – the amount of time the borrower has to pay back a loan
Late fee – fee that might be charged if the borrower is late on a loan payment
Collateral – property that you promise to give the lender if you fail to repay the loan in accordance with your loan agreement
Early repayment – full payment of your loan before the end of your loan term which some lenders will charge a fee for
Default – failure to pay back your loan which can lead to credit and other financial implications
Installment credit vs Revolving credit
Installment credit is a loan that is repaid back in fixed payments, usually monthly payments, during a set term. In contrast, revolving credit has a limit to the amount that can be borrowed but has no fixed payment schedule. Instead, the borrower of revolving credit makes charges, repays some or all of those charges, and continues to make charges. The most common form of revolving credit is credit cards. Folks with high credit card balances (revolving credit) may often consolidate their debt into an installment loan.
Both revolving credit and installment credit affect your credit score. Payment history is a big factor for installment credit. You’ll want to make sure you don’t miss payments and pay on time.
Pros and Cons of Installment Credit
- Installment credit comes with predictable payments. The loan agreement has a set schedule of when amounts need to be repaid and borrowers can plan in advance and budget accordingly. That also means you can build positive credit history since lenders will report payments to the credit bureaus like TransUnion, Experian, and Equifax.
- Many forms of installment credit such as mortgages allow for early prepayment. So if you have the funds to pay off a part of your installment credit early, you will save on the total amount of interest paid over the life of the loan.
- Annual percentage rate of interest (APR) is lower than many credit cards and short-term loan options such as payday loans, pawnshops, payday advance apps, and title loans.
- Unlike credit cards or lines of credit, you cannot add to the amount of an installment loan easily. You’ll need to take out a new loan and go through another loan application and approval process to borrow additional funds.
- Your credit score is important and installment credit lenders may have a minimum credit score requirement. Your credit score is calculated from your previous repayment history, credit utilization ratio, types of credit, and other factors and depends on the credit scoring model used (VantageScore and FICO score are two examples). The lower your credit score, the higher the interest rate your lender will charge. You might want to borrow elsewhere if you have bad credit or improve your credit to reduce the interest rate you have to pay to borrow money.
- Installment credit can come with other fees and charges such as origination fees, credit check fees, fees for late payments, finance charges, and prepayment penalties. Read your loan agreement and understand your loan terms before accepting your loan.
Types of Installment Credit or Installment Debt
- Mortgage. A mortgage is a loan secured by property or real estate, usually paid back in monthly payments consisting of both principal and interest over the term of the loan. The most common term of a mortgage is 30 years. Principal is the repayment of the original loan balance while interest is the cost of borrowing the principal. The lender of a mortgage has a claim on the property if the borrower defaults on the loan. The process of applying for a mortgage can be stressful and take a few weeks. An appraisal of the property value must be performed and the lender uses a considerable amount of borrower information as well as property information to underwrite and approve the loan.
- Auto loan. Over 85% of new cars are financed with a car loan. There are two primary methods – direct where the lender works with the borrower directly and indirect where the car dealership arranges financing with the lender for the borrower. The collateral for the car loan is the car itself, meaning the lender can possess the car if the borrower defaults on the loan. The majority of car loans have monthly payments of principal and interest and are usually paid off in 5-7 years. The application process is detailed and almost always requires a hard credit check.
- Student loan. A student loan is a type of loan designed to help students with post-secondary education including tuition fees, books, and living expenses. The interest is usually lower than other loans and the installment payments may be deferred until the student finishes school. In the US, student loans are regulated and there are strict laws around repayment period, renegotiation, and bankruptcy. Most college students can qualify for federal student loans while the qualification criteria from private lenders can vary but may include credit score, income of parents, and other financial considerations.
- Personal loan. A personal loan is money borrowed from a bank, financial institution, or other lender than is usually repaid back in installments over a 2-5 year period. Personal installment loans are usually unsecured, meaning there is no collateral backing the loan. In addition, the borrower can use the money for anything. When applying, lenders may check your credit score, debt-to-income ratio, monthly income, credit utilization, and other information as part of underwriting and to determine whether to approve you for a personal loan. Loan APRs can range from 6% to 36%, and personal loans can be a good way to consolidate more expensive debt such as short-term loans, payday loans, and credit card debt.
Example Lenders of Installment Credit
We’ve included three installment loan direct lenders that serve a variety of customers. There are many lenders out there and be sure to do your own due diligence and research before getting a loan from any brick and mortar or online lender.
- Possible Finance. Possible Finance has installment credit or loans that are repaid back over two months in multiple paychecks. If you have a low credit score or no credit score, you can apply and get approved with Possible Finance easier than other lenders. Possible does not check your FICO score and just uses your bank transaction history and your personal details to approve you for a loan. Repaying your loan with Possible Finance on-time can help build positive credit history and improve your long-term financial health. The APR for loans with Possible Finance will be higher than other installment credit products and installment accounts including most personal loans and credit cards – this is because many of their customers have trouble accessing these products due to the stringent requirements and credit checks done on the borrower.
- SoFi. SoFi is a financial company that offers student loans, home loans, personal loans, and a variety of other financial products. They may or may not be the direct lender depending on the loan they offer. Most of their student loans, home loans, and personal loans are considered installment loans or credit because they are repaid back in fixed installments over a scheduled period of time. Because of their size and funding, they have competitive rates across a wide breadth of products. However, most of their products will require a credit check and have specific requirements on income and other underwriting criteria. Please note that we are not affiliated with SoFi.
- PenFed Credit Union. PenFed is one of many financial institutions that offer personal loans along with a variety of other credit products. Their personal loans can be used for things such as home renovations, debt consolidation, travel and vacation, and auto repairs. The personal loans are usually unsecured, meaning there is no collateral associated with the loan. The application process, credit score minimums, APRs and origination fees can range depending on the product and what you’re looking for. Please note that we are not affiliated with PenFed Credit Union.
Alternatives to installment credit
- Credit card. A credit card is a type of revolving credit in which a borrower can purchase goods or services “on credit” and pay back part or all of the balance every month. The borrower can only purchase goods or services up to a certain amount outstanding up to a credit limit. Although the minimum payment on a credit card every month can be a low amount of the outstanding, APRs on consumer credit cards are often higher than other types of credit, including most personal loans. To qualify for a credit card, you’ll need to apply and get approved. Most consumer credit card issuers will check your credit score when you apply.
- Revolving line of credit. A revolving line of credit or revolving account involves a bank or financial institution offering a certain amount of available credit for a set period of time or for an indeterminate amount of time. The debt on the line of credit can be paid periodically and borrowed again once it is repaid. A credit card is a form of a revolving line of credit but you can also ask a bank or financial institution for a line of credit separately, especially since they are usually cheaper than having outstanding amounts on a credit card. However, research into whether there are other fees such as origination fees when evaluating between a revolving line of credit, revolving credit card, or installment credit.
- Payday or other short-term loan. A payday loan or other short term loan is an unsecured single payment loan usually due on the next payday. A typical payday loan will have an annual percentage rate of interest (APR) of 400%, substantially higher than most other types of borrowings. Borrowers still use payday and other short term loans because applying may not require a credit check and the requirements to get a payday loan are less than many other types of installment or revolving credit. In addition, most payday lenders can offer money in minutes, whether in cash or on the debit card.
- Friend or family. Getting a loan isn’t always the best solution, especially if you have bad or no credit and borrowing can be expensive. If your friends or family are willing to spot you some money, go for it! Be sure to write up an agreement even though you are borrowing from someone you know – it prevents sticky conflicts with the folks you care about. In addition, treat it as a loan and repay it back similar to how you would repay back a loan with a financial institution. Your friends and family will appreciate that!
On one of our iTunes reviews, a Possible Finance customer mentioned that borrowing from Possible Finance is like borrowing from a good friend plus it builds credit! We believe that’s absolutely true and hold ourselves accountable to providing the best service and support for our customers. We believe in fair and affordable access to credit and want you to be able to build credit history and improve your long-term financial health.
There are many types of installment credit out there – mortgages, personal loans, installment loans (including Possible Finance), and others. Each type of loan can be used for specific situations and have its own pros and cons. Some have little application requirements, require little or no credit, but will have higher interest rates and fees. Others are more stringent, have a minimum credit score, and have lower interest rates and fees. Do the research and find the best option for your financial profile. Your wallet will thank you!