What is an Installment Loan?

The simplest explanation of an installment loan is this: You borrow a set amount of money and then pay it back with interest over a set amount of time. The fixed payments that you make are called installments, hence the term, “installment loan.”

The Basics of Installment Loans

In an installment loan, you approach a lender with a request for funds. Perhaps you need to consolidate debt or borrow money for bills. The lender checks your credit to determine how likely you are to pay the loan back, and if you qualify, the lender offers you terms for the loan.


Loan terms for an installment loan will include repaying the original amount of the loan plus interest, or extra money the lender is charging to allow you to borrow it in the first place. Interest rates will vary based on how likely you are to repay the loan, as evidenced by your credit score. If you have a good credit score, you will pay less interest on the loan. If you’ve defaulted on loans in the past or have late payments, you may be charged more in interest for the loan to help offset the risk the lender is taking by loaning you the money.


If you borrowed $5,000 from the lender, you might wind up repaying that $5,000 plus interest.  The exact amount you repay is then calculated according to the term, or how long it will take you to repay the loan. The more installments you make, the longer you’re borrowing the money, and the more you’ll pay in interest. Choosing a shorter term for repayment is usually best for you. The longer the term, the more you pay in interest. But this also needs to work with your budget, and longer terms usually have lower monthly payments.


Since you’ll be making a set number of payments over the terms of the loan, you’ll know exactly how much you’ll be expected to pay each month. Once you’ve finished making all the payments on the installment loan, you’ll have repaid the original amount plus the interest on the loan and your obligation is complete.

Types of Installment Loans

When looking to borrow you will find installment loans can be used for many purposes and are typically arranged into two categories – secured and unsecured.

Secured Loans

Secured installment loans are loans that are tied to something of value. The item of value is the collateral for the loan. If you borrow money to buy a car, for example, the car is the collateral.


If you stop making payments on the secured loan, the bank will ask you to start payments again, and if you don’t, it will simply repossess, or take, the car from you. That way, the bank can sell the car and recoup some of the money it loaned you. You, however, would now have no vehicle and a terrible credit score since the bank would report the repossession to the credit bureaus.

Common types of secured loans include:

  • Mortgages
  • Vehicle loans
  • Camper, boat, and motorcycle loans
  • Title loans
  • Electronics and furniture loans

Unsecured Loans

An unsecured loan, on the other hand, is not tied to collateral. The lender is simply trusting you to repay the funds you’ve borrowed. Understandably, these loans have more risk for the lender, since the bank is simply counting on your good faith to repay their money, so you will likely be charged a higher interest rate in the terms of the loan. Canada does have limits on what banks can charge for unsecured loans, to help protect borrowers from taking on loans that are truly predatory.


Unsecured loans are not tied to collateral, but they can be tied to a specific purpose where there are restrictions on the funds. Medical and school loans are tied to medical care and education, for example.


Other unsecured loans are designed as personal loans are not tied to any specific purpose. These are a special type of installment loans that can be spent at the borrower’s discretion. A personal loan might be used to pay for car repairs, to pay off other loans, for debt consolidation, to remodel a home, or even to take a special trip or pay for a wedding. With these loans, the lender has no control over how you spend the funds, and, accordingly, are available only to borrowers with good or excellent credit scores.


A personal loan and installment loan are very similar and almost the same. It is more difficult to qualify for a personal loan, which requires a good to excellent credit score and offers better rates. For those that do not qualify for personal loans, an alternative for borrowing are installment loans, which are easier to qualify for.


When it comes to borrowing installment loans online the application process is quick and a decision is offered in a short time. Once you’ve provided a few details, the lender will run some checks and you are notified in a manner of minutes whether approved.

Common types of unsecured loans include:

  • Personal loans
  • Emergency loans
  • Medical loans
  • Travel loans

Tips for Installment Loans

Installment loans can dramatically improve your quality of life when used well. However, there are best practices when it comes to borrowing money, and that includes installment loans.


  • Borrow only what you need. Loans are certainly not free money, and borrowing more than you need will increase your payments and potentially limit your lifestyle.


  • Carefully calculate what you can afford. Paying back your loan quickly means you’ll pay less over time, but don’t take on a loan that will cost you more than you can afford to pay every month.


  • Compare loan terms. Lenders are different and they will offer different loan terms. Don’t take out a loan with one lender when you may be able to get better terms and pay less with another. You won’t know unless you take time to compare the two. There are many online loan sites that can help you compare loan options quickly and easily.


You can also learn more about borrowing at AimFinance, along with budgeting, debt and additional advice for online loans in Canada that can help you with making the right choice.

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.