Table of Contents

What is an Installment Debt?
Understanding Installment Debt
Special Beacons
Different types of Installment Debt
Installment Debt vs. Personal Loans
Advantages and disadvantages of Installment Debt
The Bottom Line
Installment Debt FAQs

Personal Finance Loans

Installment Debt Types, Meaning, Pros and Cons
By Julia Kagan
Updated June 14, 2021
Reviewed by Khadija Khartit
What is an installment debt?

A installment loan is a loan that is repaid by the borrower in regular installments. The installment debt is typically paid in monthly installments which comprise interest and a portion from the principal. This kind of loan is an amortized loan that requires a regular amortization schedule to be drafted by the lender, which outlines all the payments over the duration of the loan.
Key Takeaways

A installment loan is an loan that is repaid in regular installments like automobile and mortgage loans.
Installment loans are ideal for those who are borrowers, as they’re a way to finance big-ticket items, while they offer lenders regular payment.
Installments loans are typically safer than alternative loans that don’t have installment payments, for example, balloon-payment loans and interest-only loans.
An installment loan could be a personal loan.
Your amortization schedule determines how much you have to pay for monthly installment debts.

Understanding Installment Debt

A installment debt is a preferred option for financing consumer big-ticket items such as homes automobiles, appliances, and homes. The lenders also prefer installment loans since it offers a steady cash flow to the issuer through the duration of the duration of the loan with regular payments based on a standard amortization schedule.

The amortization schedule will determine the size of the monthly installment debt payment. The amortization schedule is designed based on several variables which include the principal amount issued, the interest rate charged, any down payment, and the total number of payments.

For instance, not many people can afford to pay off the cost of a house with a single installment. So the loan is made with a principal covering the home’s value and is amortized using monthly installments spread over a period. Mortgage loans are generally structured using a 15-year payment schedule or a 30-year payment schedule. In this way, the borrowers of mortgages can make regular installment payments throughout the course of the loan which can help enable home purchases to be less expensive.

Conversely, an appliance that costs $1,500 can be repaid over the course of a year for most people. Buyers can also reduce the monthly installments by making a substantial down payment of $500, for example. In this scenario, taking that the interest rate is 8 percent, the equivalent monthly payments over a year would be around $87. This means that the total financing cost over the one-year period is about $44.

However, if the buyer does not have the resources to make a down payment, and can finance the entire $1,500 price of the appliance over a year at 8 per cent, the monthly payments will be $130.50. The total cost of financing, in this instance will be a bit higher at $66.

Installments loans are often lower risk loans than loans with no installment payments.
Special Beacons

An installment loan is among the oldest loan products provided by lenders. They can create a standard amortization schedule and receive each month a cash flow from both principal and interest repayments on loans. Furthermore, high-quality loans can be considered eligible loans with certain protections, as well as providing the possibility of sale in the second market. This can increase the capital of a bank.

Installments loans are generally lower risk than other alternative loans that don’t have installment payments. These loans may include balloon-payment loans or interest-only loans. These types of loans are not structured with the traditional amortization schedule, and have greater risk than traditional installment loans.
Different types of Installment Debt

Traditional loans provided by banks for homes and automobiles are an important source of business in lending for lenders. A majority the loans are based on conservative underwriting with typical amortization schedules which will pay off principal and interest with each installment.

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 have higher interest rates, and they base the amount of principal offered on the borrower’s employer as well as per paycheck income. The loans will also be paid back in installments based on an amortization calendar but their core components involve much higher risks.

In 2014, the Dodd-Frank Act instituted legislation for qualified mortgages. The law provided lending institutions with more significant incentives to design and issue better-quality mortgage loans. Regular installment payment terms constitute an essential prerequisite for mortgages that qualify. Furthermore being an approved mortgage loan it can be protected by certain rules and is also more appealing to underwriters in secondary market loan product structuring.
Installment Debt vs. Personal Loans

An installment loan is a financial vehicle where a lender has agreed to repay the loan in installments instead of one payment. For example, a mortgage payment is an installment loan which is paid back by the borrower in monthly installments which comprise interest and principal. Federal loans for mortgages and education are two common installment loans. An installment debt is money owed for any installment loan.

The installment loan is a kind of personal loan However, there are different kinds of personal loans, including payments repaid in full with interest instead of in installments. A personal loan could come from a bank, credit union, your boss, or even a member of your family.
Advantages and Disadvantages of Installment Debt

As with any loan, there are advantages and disadvantages to the use of installment loans. For instance, if you would like to buy a house, the installment loan is a fantastic way to borrow a large amount of money and then pay it back over time. However If you are not a fan of the idea of being in the long run, borrowing money and then paying the personal loan off in full may be more appealing.

A debt that is a installment will be to be paid off according to an established schedule by the lender. An installment loan lets you budget your cash each month as you pay off your debt.

In certain instances, if you’ve agreed to pay off your loan in installments You will be penalized when you decide to pay it off earlier. Additionally that, installment loans take time to pay off, making them an investment in your finances.

Installment loans permit the borrower to pay back the loan in time.

Installment loans offer a means to obtain large amounts of money to purchase big costly items, such as a home.

Installment debt is usually an amount that is fixed each month and is a great way to manage your budget.


Installment debt can be very expensive, making it very difficult to pay it off in one payment.

Installment debt also includes interest, that adds up over years.

Some lenders may be charged a penalty if you pay off your loan in total.

The Bottom Line

A installment loan is type of loan repaid by the borrower in regular, often monthly payments that include the interest due plus some from the principle.

The term “instalment debt” refers to an amortized loan and comes with a standard amortization schedule created by the lender that shows the borrower how much they’ll owe over the course of the loan. Student and mortgage loans are typically forms of installment debt and allow borrowers to gain access to large sums of money. A loan that is installment-based is safer than borrowing large amounts that must be paid fully and with interest within short periods of time.
Installment Debt FAQs
What Is An IRS Installment Contract?

A IRS installment agreement allows you for paying the IRS via installments any tax that you owe.
How Much Interest Does the IRS Charge for Installment Agreements?

The IRS charges one-half of a 1% rate on unpaid taxes for up to 10 calendar days. Afterward, the interest rises to 1%. However “if you file your return by its due date and request an installment agreement, the one-half of 1 percent rate is reduced to one quarter of 1% in any month in which the installment arrangement is in effect,” according to its website.1
What is an installment sale?

An installment sale is a sale of property in which you receive at least one payment beyond the tax year for the sale. The rules for installment sales aren’t applicable in the event that you sell your home at the cost of a loss.2
What happens if You Can’t Pay the Installment Then what happens to your loan?

Like every loan, if you don’t pay what you owe, then you may find yourself in a lot of financial trouble. If you fail to pay your mortgage for instance you could be forced to sell your house. Additionally, if you do not pay the installment loan, the fees, interest, and potential penalty charges will increase. If you don’t pay your loans you are at risk of damaging your credit score.
How do you get an Installment Loan With Bad Credit?

It is possible to get an installment loan with poor credit, but you find yourself saddled with an increased interest rate on the loan when your credit score is lower than 600. If you search for an loan, you may get one even if your credit is thought to be “bad” according to one of three “big three” credit bureaus.3 But, you might not qualify for a mortgage, which is a type of installment loan which is only available for those with a credit score below 550.4
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Related Terms
What is an Amortization Schedule? How to Calculate With Formula
The amortization plan is a complete schedule of blended loan payments showing the amount of principal and an amount for interest.
What is an amortization schedule? How do you calculate using Formula
Amortization is an accounting technique employed to decrease the book value of the loan or an intangible asset for a specified time.
What is a Mortgage? Types, How They Work and examples
A mortgage is an loan that is used to buy or maintain real estate.
Amount Financing
The term “amount financed” refers to the total amount of credit that is granted to an applicant in exchange for the purpose of a loan and is the principal amount of a loan that is the basis on which interest calculated.
Nontraditional Mortgage
Nontraditional loans are a general term for all mortgages that don’t conform to standard mortgage characteristics.
Deferred Interest Mortgage
A deferred interest mortgage allows the borrower to defer paying some or all of the loan’s interest, which results in lower monthly payments for an agreed-upon period of time.
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