The difference between an installment loan and a personal loan is that an installment loan can be any type of loan paid off in regular intervals over time, while a personal loan is just one example of an installment loan. All personal loans are installment loans, as are car loans, mortgages and home equity loans.
Some people think installment loans are bad because they only allow you to borrow once, they sometimes require collateral and they often charge fees. Installment loans can also hurt your credit score if the lender does a hard inquiry into your credit history when you apply and if you don't make your monthly payments on time.… read full answer
Why Some People Think Installment Loans Are Bad
Installment loans only allow you to borrow one time. Unlike credit cards or other lines of credit, you can only borrow money from the lender in one lump sum. An installment loan may not be right for you if you think you'll need to borrow more than once.
Installment loans may require collateral. A few types of installment loans will require you to put up something as collateral, like your house or your car. If you don't repay the loan, you risk losing this collateral.
Installment loans may charge fees. Some examples of fees you may be subject to include personal loan origination fees and mortgage closing fees.
Installment loans may hurt your credit score. When you apply for an installment loan, the lender may do a hard pull of your credit history, which will drop your score by about 5 to 10 points. Also, if you don't make your monthly payments on time, your credit score may suffer a lot more.
Although these disadvantages may seem daunting, installment loans should help your financial standing overall if managed responsibly. You just need to make sure you make your payments on time and follow the terms of your loan.
Installment loans also help make it possible to pay off big purchases over time, and they cover a wide range of needs. They can be paid off early, too -usually without penalty.
An installment loan is better than a payday loan because installment loans have much lower fees, longer repayment periods, and larger loan amounts, and they can improve your credit score over time. Payday loans are predatory and often have fees equivalent to an APR of 400%+, so they should be avoided.… read full answer
For your convenience, below is a comparison of payday loans and installment loans.
Payday Loans vs. Installment Loans
$500 or less usually
$250 - $100,000+
400%+ (charged as fees)
5.99% - 428%
Fees often equivalent to an APR of 400%+
0% - 8% origination fee
Closing fee (mortgages)
2 - 4 weeks
3 months - 30 years
Credit Score Requirement
580+ (none in some cases)
Effect on Credit Score
Payments usually aren’t reported to credit bureaus
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