Is a Personal Loan an Installment Loan?

If you’re considering a personal loan, it’s important to understand how they work — and how they differ from other options like a credit card or line of credit. Knowing how they work and what repayment can look like can help you make the best decision for your unique financial situation.

Let’s explore what makes a loan an installment loan, how it differs from revolving credit and how it may impact your credit score.

Is a personal loan an installment loan?

Yes, personal loans are generally considered installment loans. If approved, you receive an upfront lump sum of cash that’s repaid in smaller “installments” over a set period of time.

However, not every product marketed as a personal loan is the same. Some lenders may also offer personal lines of credit, which are a type of revolving credit. When comparing offers, it’s important to look over the loan agreement so you know which type of credit you’re applying for.

What is an installment loan?

An installment loan is a loan that’s repaid in fixed, scheduled payments over a set period called the loan term. The borrower receives an upfront, lump sum payment, then repays the money in equal installments (typically bi-weekly or monthly payments) until the loan is paid off. This repayment period is known as the loan term, which is why you may also see installment loans referred to as term loans.

Personal loans are a common type of installment loan, but others include mortgages, auto loans and student loans. The different types of installment loans have different purposes, so it’s important to consider what the money will be used for before you apply. Additionally, things like interest rates, repayment periods and other terms will vary depending on the lender and the overall creditworthiness of the borrower.

What are some different types of personal loans?

Common types of personal loans include personal installment loans, personal lines of credit, bad credit loans and no credit check loans. Personal loans may also be secured or unsecured. Different loans may be right depending on your financial situation. Be sure to consider things such as your credit history, budget and why you need the loan before you apply.

Personal installment loans. This is what many people think of when they hear “personal loan.” Borrowers receive a lump sum of cash that they repay over a fixed period of time.

Personal line of credit. A personal line of credit is a form of revolving credit. You can draw funds as needed up to a set credit limit, and as you repay, the funds become available to borrow again. They can be useful if you need to cover an ongoing expense or if you aren’t sure of the total cost before you need to borrow.

Bad credit loans. Bad credit loans and no credit check loans are designed for borrowers who may not have good credit. While they can be helpful in emergency situations, you should be aware that they often come with high interest rates and less favorable loan terms.

Secured personal loans. Secured personal loans are loans that require collateral. Collateral is an asset of value — such as a savings account or vehicle. While this may help you get a lower interest rate, be aware that if you fail to repay the loan, the lender can seize this asset to recoup their losses.

Unsecured personal loans. Unsecured loans don’t require collateral. This can help you protect your assets, but they may have higher interest rates, and missing payments can still have a negative effect on your financial situation and credit score.

Is a line of credit a personal loan?

A personal line of credit isn’t the same as a personal loan, but it can help cover many of the same expenses. A line of credit is a type of revolving credit. Borrowers are given a credit limit they can borrow from, and as the funds are repaid, they become available to borrow again. These funds can be used for emergencies, home and auto repairs and other ongoing expenses.

Personal loans can work well for large, one-time expenses when you know how much you need to borrow. Lines of credit can offer more flexibility for ongoing or unpredictable expenses, since you can draw funds as needed rather than reapplying each time.

What is revolving credit and how does it work?

Revolving credit lets you borrow up to a set limit, repay what you use, and borrow again — without submitting a new application each time. Common types of revolving credit include credit cards and personal lines of credit.

How does a personal loan affect your credit score?

A personal loan can affect your credit in several ways, including your credit mix and payment history. Making consistent, on-time payments can help build your credit over time, while missed or late payments can have a negative effect. Credit bureaus like Experian, Equifax and TransUnion use a variety of data to calculate your credit score. Here are a few common factors:

Application. When you apply for a personal loan, the lender may conduct a hard credit check. This can temporarily lower your score. However, some lenders may conduct a soft credit check, which won’t impact your credit score.

Payment history. Payment history is one of the biggest factors when it comes to calculating your credit score. A good payment history can help you build positive credit. However, missed or late payments can appear on your credit report and have a negative impact on your score.

Credit mix. Having a mix of revolving and installment credit can show lenders that you have experience managing different types of debt. A mix of different types of credit can help your score. However, you shouldn’t take out a loan solely to improve your credit mix.

Final Thoughts

A personal installment loan provides an upfront, lump sum of cash that’s repaid on a fixed schedule, rather than drawing from a credit limit the way you would with a credit card or line of credit. They typically have fixed payments and fixed interest rates — making repayment predictable.

Before applying, be sure to do your research and be sure to understand the loan terms and repayment terms, as they will vary by lender.

DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.