What is an installment loan?
An installment loan is any loan that has two or more scheduled payments to pay off the balance of the loan. Most loans are an installment loan - perhaps because consumers who borrow money want predictable payments and a schedule to repay the loan on. The term “installment loan” is most strongly associated with traditional consumer loans, originated and serviced locally, and repaid over time through regular principal and interest payments, usually monthly payments. These installment loans are generally considered to be safe and affordable alternatives to payday loans and title loans, and to open ended credit such as credit cards.
Installment loans, sometimes referred to as installment credit, can involve collateral like a title or auto loan (your car’s title) or a mortgage (your home’s deed). If a borrower cannot pay the loan back, the loan lender has a right to repossess the collateral. Some installment loans do not need collateral such as some personal loans. Instead, lenders who offer personal loans usually run a credit check on the borrower to determine creditworthiness.
In contrast to installment loans, a revolving loan is one in which you can borrow money up to a certain limit without a set payment schedule and continue to have a loan amount outstanding and rolling over month-to-month up to the credit limit. Many banks, department stores, and gas credit cards are revolving loans. Many people don’t consider revolving loans a loan and traditionally view an extension of credit for a set amount with fixed, scheduled payments a loan - exactly what an installment loan is.
A loan from Possible Finance is an installment loan repaid back over two months. Applying doesn’t require a good credit score (bad credit or no credit is ok) and if approved, you can receive money in minutes. Because a loan from Possible Finance is set up as an installment loan and Possible reports to two of the three major credit bureaus - Experian and TransUnion - borrowers can build credit history and improve their long-term financial health.
What you'll need to apply for an installment loan
You’ll likely need the below things to apply for an installment loan with any lender, financial institution, or bank:
- Verifiable source of income - this may be through linking a bank checking account for visibility, a paystub, or other evidence
- A bank account or a similar alternative - some lenders will allow digital bank accounts or prepaid cards but most will not
- State or government issued ID - lenders are checking whether you live in the state and verifying your identity to make sure they are complying with state regulations on lending
In addition, your lender may ask for the below depending on what type of installment loan you are getting:
- Mobile phone or internet if you are getting an installment loan from a mobile app or online site
- Online bank checking account login so lenders can deposit and withdraw money for your loan
- Proof of residence, passport, or other form of identification if you don’t have a state-issued ID that’s recent
- A minimum credit score for certain installment loans (FICO or VantageScore)
- Property appraisal if you are getting an installment loan secured by an asset such as a car or house
For an installment loan from Possible Finance, you’ll need:
- An online bank checking account with verifiable income
- State-issued ID
- Mobile phone with internet
Are credit checks required?
Depending on the lender, a credit check may be required. The lender may check your credit with all the main credit bureaus including Equifax, TransUnion, and Experian - or they may check your credit with only one or none of them. In addition, there are alternative credit bureaus such as ChexSystems and Clarity Services who focus on credit information not available to the main credit bureaus. For example, ChexSystems focuses on bank overdraft data while Clarity Services focus on subprime lending.
There are two main types of credit checks - a soft inquiry and a hard inquiry.
A hard inquiry - also known as hard pull or hard credit check - usually occurs right before your lender, bank, or financial institution needs to make an underwriting decision. It can take place right before you take out a car loan, get a home mortgage, or get a credit card. A hard inquiry can lower your credit score by a few points or none at all. Multiple hard inquiries in a short period can signal to loan lenders that you could be a high-risk customer.
A soft inquiry - also known as a soft pull or soft credit check - often happens when credit card companies or lenders check your credit score to see if you qualify for a product or service. Employers may also do a soft inquiry along with the background check before hiring you. Short-term lenders and installment loan lenders will often do some form of soft inquiry to determine whether they will lend money to you. A soft inquiry doesn’t hurt your credit score but is visible and will show up on your credit report.
Types of installment loans
Below are some common installment loan types:
- Personal loan - A personal loan is a “catch-all” term usually referring to a loan that is not secured by collateral and repaid in installments. Personal loans will usually have a term of 1 to 5 years and will need to be paid back in periodic installments, usually monthly. Because personal loans usually require no collateral, the bank or online lender has nothing to repossess if you cannot repay the loan. Therefore, many personal loan lenders will require some sort of credit check. Those with bad credit or no credit history will struggle to get a personal loan. Loan amounts can range anywhere from $1,000 to $50,000 and loans can be used on anything from home improvement, emergency expenses, vacations, etc. APRs will range depending on your credit score and the repayment terms and structure of your loan but they will usually not exceed 36% due to federal and state regulations on these types of loans
- Possible loan - A loan from Possible Finance is a type of installment loan that builds credit history. The direct lender does not check your FICO score or VantageScore and you can receive up to about $500* in minutes through your mobile app. The loan is paid back in multiple bi-weekly installments during a two month period or longer. Borrowers can reschedule payments if needed within the mobile app and there is a grace period on payments. Because Possible Finance reports all payments to major credit bureaus, on-time payments can build positive credit history and improve long-term financial health.
- Mortgage - A mortgage is a loan secured by real estate property. If you cannot repay the mortgage, the bank or online lender can repossess the property used as collateral on the mortgage - although specific rules and regulations will vary state by state. The most common types of mortgages are a 15 year and a 30 year fixed rate loan (very long-term loans). Principal and interest payments are monthly and total the same amount every month to make it simple for the borrower. During the early years of a mortgage, the interest proportion of the monthly payment will be higher while in the latter years of a mortgage, the principal proportion will be higher. Applying and getting a mortgage can be a lengthy process and will usually include an appraisal of the property secured by the mortgage. In addition, there are usually fees such as origination fees, appraisal fees, and other fees associated with getting a mortgage.
- Vehicle and car loans - The most common type of vehicle loan is a car loan. A car loan is a loan in which the borrowed amount is used to purchase a car. The loan is secured by the car itself and used as collateral. If you cannot repay the loan, the lender has the right to repossess your car. Before you get a car loan, know how much you can afford in terms of monthly payments. Applications will likely involve a credit check and your credit score may have an impact on the interest rate for the loan. Those with bad credit or no credit will have trouble getting an auto loan. Some vehical loans will come with an origination fee and other fees as part of the process. Typical car loans have a term of 24 months to 72 months and are repaid in monthly installments which include both principal and interest monthly payments. Therefore, these loans can be considered a monthly installment loan.
- Student loan - A student loan is a type of loan designed to help students pay for school-related fees such as tuition, books, and living expenses with borrowed money. Student loans are offered by the federal government as well as private institutions and lenders such as banks, credit unions, and other companies. Some student loans are subsidized by the government to give borrowers a lower cost. In addition, interest payments on student loans are usually delayed until after the student graduates and finishes school. Most college students can qualify for student loans and the term and amount of the student loan is determined by education level and dependent status.
- Credit builder loan - This is a loan in which the amount you borrow is held in a bank account while you make payments on the loan, thereby building credit history. Because what you borrow is held in a bank account as collateral by the lender, the lender has no risk and could simply collect the money if you were to stop paying. Payments are usually monthly in installments and they’re reported to the three major credit bureaus. Therefore, credit builder loans can improve your credit score over time even though it does force you to basically “save” money every period to repay the loan while never able to access those funds.
- Certain payday loans - Some payday direct lenders are expanding into installment loans (rather than being paid in one lump sum) and many times, they have the same high annual percentage rate of interest (APRs) as payday loans but with a longer term, even up to 5 years and larger amount, up to $10,000. Online installment loans are especially popular because payday lenders are skirting normal state regulations around payday lending and able to offer similar predatory loans to borrowers. Application requirements are similar to personal installment loans and most of the time, the lenders will run some form of credit check. Because of the term of these loans as well as the APR, it’s possible the initial payments on the loan are almost all interest and the loan amount doesn’t significantly go down until much farther into the term of the loan.
Process to get an installment loan
The process of getting an installment loan can vary by lender and by type of installment loan. In addition, getting an installment loan online can be a slightly different process than getting one in person. We’ll go through the process of getting a personal loan, a mortgage, as well as a Possible loan.
Process to get a personal loan
- Consider why or for what you want to use a personal loan for.
- Check your credit score - almost all lenders will do some type of credit check.
- Do your research and check out a few personal loan companies.
- Gather everything you need for the application including your income, debt-to-income ratio, primary monthly expenses (like rent), identification, your current employer or employment situation, and any relevant documentation.
- Apply and compare loan prices and loan terms from a few lenders.
- Review and sign your loan documents and receive funds.
Process to get a mortgage
- Consider the type of mortgage you want such as fixed or variable, the term, and the amount and whether you can afford the mortgage.
- Confirm your credit score - most lenders will do at least a soft inquiry on your credit.
- Research and compare possible mortgage lenders
- Gather everything you need for the application which may include income and employment information, current assets and debt, personal information, and identification.
- Fill out an application or multiple applications from lenders. Once you submit an application, you’ll be able to review estimates from lenders and compare lender to lender.
- Choose the best lender for you.
- Loan processing and underwriting starts. This can include due diligence on your background, an appraisal of the property secured by the mortgage, and a variety of other things.
- Loan is approved and you’ll review and sign the documents before receiving the funds.
- Download the Possible Finance app on the iTunes or Google Play Store.
- Sign up and apply with your online bank account, ID, and requested information.
- Over 80% of customers get an instant decision and almost all within 1 day.
- If approved, e-sign the documents within the app and accept the loan.
- Depending on ACH or your Visa debit card, funds can be deposited in 1-2 business days or a few minutes, respectively.
Benefits and risks of an installment loan
- An installment loan has predictable repayment schedules. You’ll know in advance when interest and principal repayments are due and how much. Therefore, you’ll be able to plan and budget accordingly.
- You can build credit history if your lender reports payments to the credit bureaus. If you’re making on-time payments with your installment loan, you should be rewarded. Be sure your lender is reporting your on-time payments to the three most common credit bureaus: Experian, TransUnion, and Equifax.
- Annual percentage rates of interest (APRs) are often lower than revolving lines of credit or credit cards as well as payday loans, title loans, and other short-term loans. The term of the loan tends to be more than one year for many installment loan types allowing you more time to repay.
- Prepayment of your installment loan is usually available with a fee or no fee. If you have additional funds to reduce your debt, you’ll usually have the flexibility to pay down your installment loan
- An installment loan is inflexible. Once you agree to and sign the loan documents, it is difficult to borrow more, change your repayment schedule, and make other adjustments. Changing the loan can cause a re-approval of the loan or result in fees that are unplanned.
- Your credit score can go down if you fail to pay your installment loan. Repayment history is one of the most important aspects of your credit score. Multiple failed payments on an installment loan will likely reduce your credit score significantly and it’ll take time to rebuild it.
- Watch out for fees on an installment loan. Even if other loans have higher interest rates, with an installment loan, there can be origination fees, credit check fees, late payment fees, finance charges, and prepayment penalties.
Where can I get an installment loan?
The amount of lenders, banks, and other financial institutions that lend out installment loans is huge and can be hard to research. What should you consider and who should you choose?
Here are important considerations to consider:
- Your credit score will have an impact on which lender is best for you. Some lenders have a minimum credit score and others have the best pricing compared to other lenders only for some credit score ranges.
- The amount of money and term is important and will impact which lenders are available. For example, many lenders don’t offer installment loans under $1,000.
- Your state, address, and employment will impact whether the lender can offer a loan to you. Each state has different lending regulations and there are federal lending regulations as well.
- How well-known and reputable is your lender? A lender that’s more well-known is likely more trustworthy but it doesn’t mean they have the best price. In fact, well-known lenders may be making more profits and spending the money on advertising their brand!
Below are some example lenders and financial institutions for certain types of installment loans:
Personal loan - Possible Finance, SoFi
Mortgage loan - Quicken, Chase Bank
Car loan - USAA, Capital One, Ally Bank
Student loan - Stafford (federal), Sallie Mae (private)
Credit builder loan - Federal Credit Union, Self
Payday loans - Advance America, LendUp
You can check the specific lender you’re considering at the NMLS Consumer Access portal.
Alternatives to installment loans
Installment loans are a major segment of the loan market but there are alternatives if something else is a better option for you. Evaluate all of your options before getting an installment loan.
- Credit card. A credit card is a revolving type of credit in which a borrower can purchase products or services “on credit” and pay back part or all of the balance every month or at a regular payment cycle. The borrower can only purchase goods or services up to a certain amount up to the agreed upon credit limit. Although the minimum payment on a credit card every month can be a low amount of the total outstanding, APRs on consumer credit cards are often higher than other types of credit including most personal loans. A normal APR would be in the 25-30% range. To qualify for a credit card, you’ll need to apply and get approved. Most applications are online and most consumer credit card issuers will check your credit score via a hard inquiry when you apply.
- Revolving line of credit. Banks and financial institutions offer a revolving line of credit which has a certain amount of available credit for a set period of time or even an indeterminate amount of time. The amount of debt outstanding on the line of credit can be paid periodically and borrowed against once it is repaid. There is usually no requirement to pay off any amount of the principal but the interest must be paid on schedule. A credit card is one type of revolving line of credit but you can ask a bank or financial institution for a line of credit separately, especially since revolving line of credits are usually cheaper than having outstanding amounts on a credit card. However, line of credits can have other fees such as origination fees or usage fees.
- Payday or other short-term loan. A payday loan, cash advance, or other short term loan is an unsecured single payment loan usually due on the next payday. A typical payday loan will have a higher interest rate and average an annual percentage rate of interest (APR) of 400%, more than other types of borrowings. Borrowers 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 and emergency expenses and other needs just can’t wait. This is helpful in a short-term financial crunch.
- Friend or family. Perhaps getting a loan isn’t always the best solution for you, especially if you have bad or no credit. Borrowing can be expensive and if you can’t repay, you could hurt your credit score. 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 it and you’ll be able to borrow from them in the future!
History of installment loans
While it is believed that installment loans are a fairly new concept, we have evidence of this practice dating back to 3500 BC! It is believed that the installment loan was created in the first known urban civilization Sumer. Sumer was in what is now Southern Iraq and had a robust agricultural community even though 89% of their population lived in an urban setting. There is evidence that farmers took installment loans to invest in their crops to be paid back at a future date, a practice that still happens today in modern times.
In 1800 BC in Babylon, today’s central Iraq, there exists some of the first documented regulations for installment loans. In the 18th century BC, Hammurabi, the King of Babylon, created laws stating, “all loans needed have a public witness to be valid”. He also set the legal maximum interest to be charged at 33% for grains and 20% for silvers lent. Much later in 1545, King Henry VIII set the legal limit for interest at 10%.
It was in the 1500’s, during the “Age of Discovery”, the first American roots to lending started as it is documented that Christopher Columbus took out loans in Spain for his travels and to discover the new world. Later on, the pilgrims took loans to pay for passage to the new world to escape the persecution they faced in Europe.
One English Philosopher, Jeremy Bentham, argued in 1787 a counter view to limiting interest rates. In a treatise named, A Defense of Usury he argues, “if risky, new ventures can not be funded, then innovation becomes limited”. Similar to what we believe at Possible Finance, Jeremy argued that folks should have fair access to capital and that limiting the interest prevented many people from getting the money they needed.
Installment loans reached scale to the masses shortly after America’s Civil War. At this time, it was common for a department store to allow installment payments to their local clientele and furniture stores often offered installment payments to their customers. Yet, it is recognized that the Singer Sewing Machine Company is the first company to leverage the idea of installment loans on a large scale. By offering their machines on installment, at “one dollar down and one dollar a week”, the common person, could afford the expensive item. Sales boomed for Singer with practically every household across America owning one sewing machine.
Modern credit started with the advent of the automobile industry. An automobile was an extremely expensive commodity - it could cost you a half year to full year’s income. The most popular Auto brand was Ford. However, General Motors quickly took the prime popular position when they created the General Motors Acceptance Company, GMAC. With 35% down and monthly installments, you too could have a new car. By 1930 2/3rds of new cars were sold on installment.
By 1950, typical middle-class Americans had revolving credit accounts at different merchants. Maintaining several different cards and monthly payments was inconvenient which created a new opportunity. Diners Club introduces its charge card, allowing the consumer to use one card with many different merchants. This helped open the floodgates for other consumer credit products. BankAmericard, now called Visa followed in 1958 - the advent of revolving credit lines and credit cards.
Throughout time installment lending has been used as a tool by societies and companies to move products and services to support economic growth. Installment lending is used by consumers as a tool to help them acquire goods and services to improve their lives.
What if you can't repay your installment loan
Life happens and sometimes you just can’t repay your loan on time. Expect inbound messages from your lender, increasing in severity over time. The main thing lenders are looking for is some type of engagement from you. Your lender is looking to work with you on repaying the loan - working proactively with your lender may reduce the severity of the messages as well as increase flexibility, reduce stress, and end in a better result.
If you’re not able to take action on your loan and repay some or all of what’s due, the lender may hand you off to a collection agency. The primary objection of a collection agency is to get you to pay off some or all of your loan. The good news is you may be able to settle to pay off a lower amount than originally owned with the collection agency - the bad news is that the settlement will likely go on your credit report and hurt your credit score.
If there is collateral associated with the loan (such as with a mortgage or car), expect the lender to contact you about repossessing the collateral. Laws vary in each state so be sure to understand what will happen in each state and what the lender is required to do by law.
The impact of not paying back your installment loan can be very negative! Your credit score will be hurt, you may incur additional fees and interest, it’ll be harder to obtain loans in the future, there will be ongoing stress and anxiety, and some lenders even turn to criminal prosecution. Be aware of your rights and the laws in your state and if at all possible, don’t take out an installment loan if you don’t need it in the first place!
Final verdict on installment loans
Installment loans have been around a long time and is one of the most popular types of borrowing. Few people go through life without taking out an installment loan at least once.
Applications can vary significantly by lender and by the type of installment loan you get - be sure to do your research, plan ahead, and compare rates before going with a specific lender.
If you have bad or no credit and you’re looking for up to $500* in minutes, check out Possible Finance. You’ll also have the opportunity to build credit history and improve your long-term financial health with an installment loan from Possible.
Authored by Scott: He loves all things talent or ranching. He has long been fascinated by the idea that “the Pen is Mightier than the Sword” and dreams of becoming a well-read author. Until then, he enjoys sharing short essays with others.