What are Installment Loans?

Installment loans are a form of online loans that are provided to the borrower in a lump sum at the beginning of the transaction and then paid back over time at monthly or biweekly intervals. Installment loans are typically between $500 and $10,000 but can go up to $25,000 or more.  

The terms of an installment loan can range from short-term to medium-term durations, but most fall within the range of 6 months to under 5 years. Installment loans are unsecured which means they do not require any collateral from the borrower. 

How Do Installment Loans Work?

Taking out an installment loan means that you are borrowing a specific sum of money, usually somewhere between $2,000 and $10,000, which must be repaid over a set period of time (such as a few months or a few years) and at a set frequency (for example, weekly, or monthly).

Check out our video on Personal Loans to understand the different types of personal loans available, including installment loans, and how to pick the right solution for your situation. Different loans serve different purposes and come with different terms, so it is very important to compare your options.

What are Installment Loans Used for?

Installment loans can be used for a variety of purposes, most common being automotive or home repairs, renovations, catching up on overdue bills, medical or emergency expenses, consolidating debt, travel or making a purchase. 

What You Need to Apply for an Installment Loan?

When searching for an online installment loan, most lenders will typically ask for the same basic requirements for you qualify for a loan. This includes proof of income and employment, a valid bank account, proof of age and residency. Most lenders will conduct some sort of a credit check to ensure you are not currently in collections, or undischarged bankruptcy or consumer proposal. 

Decision Drivers

When choosing between online installment loans, there are a multitude of providers. However, it is important for the borrower to screen each provider’s offerings to achieve the best alignment with their needs and financial capabilities to repay. Some of the factors that should weigh into this selection decision are:

Key Benefits

There are multiple benefits to obtaining an installment loan despite the higher interest payments that have to be made compared to personal loans. As compared to a similar substitute, the payday loan, the installment loan has a slightly lower interest rate attached to it and allows for longer repayment terms. Some other benefits include:

Efficiency, efficiency, efficiency: Installment loans are much faster to obtain than other forms of personal loans, which typically involve meeting with a banking institution’s representatives before approval for the loan is received. Comparatively, the online nature of these loans means that approval can be finished within an hour and funds can be received as soon as the next business day.

Acceptance of Poor Credit: These types of loans are available to all types of customers including those with poor credit scores as long as they demonstrate a reasonable ability to repay the principal and interest amounts. On the other hand, conventional personal loans come with strict lending criteria to target higher credit scores.

Flexible Repayment: Unlike payday loans which have to be paid back at the borrower’s next payday, the installment loans are structured more like personal loans in that regard. They allow the borrower to select the loan term and in some cases, even the repayment frequency (monthly, biweekly etc.)

Drawbacks

Potential downsides to installment loans include:

Interest Rates: With the simplified processes required to obtain the loan, and relatively fewer requirements in terms of credit strength, lenders have to be compensated for the additional risk they take in lending to borrowers with an installment loan structure. This results in higher interest rates.

Higher Repayments: Because installment loans can offer higher principal amounts than other payday loans, the cost of repayment from a purely principal perspective is higher as well, all other things equal.

Fees: Some installment loan providers may charge additional administration, origination or other affiliated fees, which could add up to total costs for the borrower.

Alternatives

Installment loans tend to be unsecured meaning that the lender cannot recoup losses via a sale of the borrower’s personal assets if the borrower fails to repay the loan. While this is a protective feature for the borrower, the flip side is that borrowers also have to pay the higher interest rate in order to compensate lenders for the greater level of risk undertaken. Therefore, some alternatives are:

Secured loans: While personal loans are typically extended to borrowers with stable credit scores, secured loans enable the borrower to offer collateral to the lender, thus making such loans less risky from the perspective of the lender. This translates to higher rates of approval and/or lower interest rates.

Mortgage/Home Equity: With a clear fixed asset (the home) as collateral, this type of secured loan enables borrowers to borrow against the value of their homes.

Credit unions: While credit union loans are largely offered on an unsecured basis, credit unions typically offer better rates than financial institutions. The rate can be pushed downwards further by securing the loan through a chequing account held with the union.

What the Numbers Say

Millennials tend to be the greatest users of “quick-cash” loans such as payday loans or installment loans. A survey conducted by PwC found that 42% of about 5500 millennial respondents surveyed had taken out one or both of these products at some point in their lives. The most common purpose that these loans were used for was to pay off student debt. 2 out of 3 respondents had at least one source of outstanding debt while 30% had more than one. Delving deeper into the college educated respondents, the number of people with atleast one source of long-term debt is 81%.

While data for installment loans is not publicly available due to lower regulations in the industry, the following graph shows the breakdown by age of payday loan users. This serves as a reasonable proxy for the installment loan, owing to the similarity in their loan profiles and target market.