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Table of Contents

What is an installment debt?

Understanding Installment Debt

Special Takes into Account

Types of Installment Debt

Installment Debt vs. Personal Loans

Advantages and disadvantages of Installment Debt

The Bottom Line

Installment Debt FAQs

Personal Finance Lending

Installment Debt Definition, Types, Pros and Cons

By Julia Kagan

Updated June 14, 2021

Review by Khadija Khartit

What is an installment debt?

An installment debt is a loan which is paid back by the borrower in periodic installments. In general, an installment debt is repayable in monthly equal installments that include interest and some of principal. This type of loan is an amortized loan that requires a standard amortization schedule to be created by the lender that outlines the payments throughout the loan’s duration.

Important Takeaways

The term “instalment debt” refers to an loan which is paid back in installments over time, such as most auto and mortgage loans.

Installment loans are great for those who are borrowers, as they’re an option to finance large-ticket products, and also offer lenders regular payment.

Installments loans are generally more secure than other loans which do not require installment payments, for example, balloon-payment loans or interest-only loans.

An installment debt may be a personal loan.

The amortization schedule you choose to follow determines how much you have to pay each month in installment debt payment.

Understanding Installment Debt

An installment loan is a popular way of financing for large-ticket items like homes or cars and appliances. The lenders also prefer installment loans due to the fact that it guarantees a steady cash flow for the issuer throughout the duration of the loan with regular payments based on a standard amortization schedule.

The amortization plan will determine the amount of monthly installment payments. The amortization schedule is designed by analyzing a variety of variables which include the principal amount issued as well as the interest rate that is charged as well as any down payment and the total number of payments.

For instance, not many people can afford to pay off the price of a house in one payment. Therefore a loan is made with a principal which is the property’s value, and amortized in monthly installments spread over a set time. Mortgage loans are generally structured using an annual payment schedule of 15 years or a 30-year payment schedule. This means that the borrowers of mortgages can make regular installment payments throughout the life of the loan which can help enable home purchases to be less expensive.

Conversely the cost of an appliance which costs $1,500 can be paid off within a year by the majority of people. The buyer can further reduce the monthly payment by making a substantial deposit of 500 dollars, for instance. In this scenario, taking that the interest rate is 8 percent, the equivalent monthly payments over a year would amount to approximately $87. That means that the total cost of financing for the year is approximately $44.

However when the buyer doesn’t have the money to pay a downpayment and finances the total $1,500 expense of the appliance for one year at 8 per cent per month, the monthly payments would be $130.50. The total financing cost in this scenario will be a bit higher at $66.

Installments loans are often lower risk loans than loans without installment payments.

Special Considerations

An installment loan is among the oldest loan products provided by lenders. They can create a standard amortization schedule and earn monthly cash flow from both principal and interest payments on the loans. Additionally superior loans can be accepted as suitable loans receiving certain protections and providing the possibility of sale to the market for secondary sales, and thus increases the capital of a bank.

Installments loans tend to be lower risk than other alternative loans that don’t have installment payments. These loans may be loans with balloon payments loans as well as interest-only loans. These types of loans do not have a an amortization schedule that is traditional and are issued with a much higher risk than traditional installment loans.

The types of installment debt

Traditional loans from financial institutions for cars and homes are an important source of business in lending for lenders. Most the loans are based on conservative underwriting with regular amortization schedules that reduce principal and interest each installment payment.

Alternative installment debt loans are also provided by a variety of higher-risk alternative lenders on the marketplace of credit. Payday loans are an example. They are charged higher interest rates, and they base the amount of principal offered on the lender’s employer and on a per-paycheck income. The loans will also be paid with installments that are based on an amortization schedule but their core components are associated with higher risk.

In 2014 in 2014, the Dodd-Frank Act instituted legislation for qualified mortgages. This gave lending institutions more significant incentives to design and issue better-quality mortgage loans. The standard installment terms of repayment are one requirement for qualified mortgages. Additionally, as an approved mortgage loan is eligible for protections and can be more attractive to underwriters in markets that are secondary to loan products.

Installment Debt vs. Personal Loans

A installment loan is a financial vehicle that allows a lender to be paid back in installments rather than one installment. For instance mortgage payments are an example of an installment loan repaid by the borrower in monthly installments that comprise principal and interest. Federal loans for mortgages and education are two types of common installment loans. An installment debt is money due on the installment loan.

A installment loan is a kind of personal loan However, there are different kinds of personal loans which include loans that are paid back in full with interest instead of in installments. A personal loan can come from a bank, credit union, a boss, or a family member.

Advantages and Disadvantages of Installment Debt

Like any loan, there are advantages and disadvantages to taking on an installment loan. For instance, if would like to buy a house, an installment loan is an excellent option to take out a large sum of money and repay it over time. However, if you hate the thought of having to deal with long-term debt, then borrowing and then paying the personal loan over in full could be more appealing.

An installment debt is paid off on the regular schedule established by the loan provider. An installment loan allows you to plan your cash each month as you pay the debt.

In certain situations, if you have signed up to pay your loan with installment payments You will be penalized if you decide you want to settle the loan early. Additionally, installment loans require time to pay off, making them an obligation to pay.

Pros

Installment loans allow the borrower to repay their loan at a later date.

Installment loans allow you to take out large amounts of money to purchase big costly items, such as a home.

Installment debt typically has monthly a fixed amount, making it easier on your budget.

Cons

Installment debt can be very high making it difficult to pay off in one lump sum.

Installment debt includes interest, that adds up over years.

Certain lenders might charge a penalty , when you repay the loan in the full amount.

The Bottom Line

An installment debt is a form of loan repaid by the borrower in regular, often monthly payments that include the interest owed plus some of principal.

An installment debt is an amortized loan and comes with a standard amortization plan created by the lender, which shows the borrower how much they’ll be liable for over the course of the loan. Mortgages and student loans are typically kinds of installment loans and let borrowers gain access to large amounts of money. A loan that is installment-based is more secure than borrowing large amounts that must be paid off completely with interest over a short amount of time.

Installment Debt FAQs

What Is the IRS Installment Agreement?

A IRS installment agreement allows you to pay the IRS by installments any tax that you owe.

How Much Interest Does the IRS charge on Installment Agreements?

The IRS has a penalty of one-half of a 1% rate for taxes that are not paid up to 10 days. The interest rate increases thereafter to 1%, but “if you file your tax return on time and request an installment agreement and you sign an installment agreement, the one-half% rate decreases to one-quarter of 1% for each month when there is an installment contract in effect,” according to its website.1

What Is an Installment Sale?

An installment sale is the sale of property in which you receive at least one payment beyond the tax year in which the sale took place. The rules for installment sales don’t apply in the event that you sell your home at an loss.2

What happens if You Can’t Pay Your Installment loan?

Like every loan in the event that you don’t pay the amount you owe, you may find yourself in financial trouble. If you are in default on your mortgage, for example, you can lose your home. In addition, if you fail to pay your installment loan the charges in addition to interest and penalty charges will increase. In the event that you do not pay your loans, you risk damaging your credit score, too.

How do you get an Installment Loan if you have bad Credit?

You can qualify for an installment loan with poor credit, but you’ll be charged an increased interest rate on the loan if your credit is less than 600. If you shop around for an loan and get one even if your credit is classified as “bad” by one of the “big three” credit bureaus.3 But, you might not be able to get a mortgage, which is a type of installment loan, with a score below 550.4