If you’re looking to pay off debt, purchase a new car, or fund a vacation, you’ve probably considered getting an installment loan at some point. A loan of any type can be risky if you’re not well versed in what it is and how it works to get the best benefit from it.

Like any financial product, an installment loan comes with pros and cons you should consider before moving forward with one. Continue reading to learn the advantages and disadvantages of buying things on installment.

What is an installment loan?

An installment loan is a loan you can repay over a set repayment term, usually every month. While there are many types of installment loans, the most common ones include personal loans, mortgages, car loans, and student loans.

How does an installment loan work?

Before we dive deep into the benefits and drawbacks of an installment loan, let’s go over how it works. With an installment loan, you’ll receive a lump sum of money upfront. Then, you’ll pay it back with interest and fees via regular payments or installments. Once you repay your loan, the account will close.


The most noteworthy advantages of installment loans include:

  • Widely available: You won’t have to look far for an installment loan. Most banks, credit unions, and online lenders offer them.
  • Fixed monthly payments: Installment loans usually come with fixed monthly payments. This means you can budget for them in advance and don’t have to worry about sudden increases that take a toll on your finances.
  • Spread out the cost of large expenses: If you don’t have the cash to pay for a large purchase like a car, kitchen remodel, or vacation upfront, an installment loan can help you meet your goals.
  • Predetermined payoff date: When you commit to an installment loan, you’ll know exactly when you’ll pay it off. Its repayment terms will be clearly listed in your loan agreement.


Here are the major downsides of installment loans:

  • Must meet certain eligibility criteria: Typically, you’ll need to have a certain credit score and income to get approved for an installment loan. Fortunately, some lenders are lenient and may approve you, even with bad credit and low income.
  • Set amount of money: Once you repay an installment loan, you won’t be able to borrow more money from it as you would with a revolving line of credit like a credit card or HELOC. You’ll need to take out another loan to access additional funds.
  • Fees: In most cases, you’ll be on the hook for installment loan fees in addition to interest. While these vary from lender to lender, they often include origination fees, late payment fees, and prepayment fees.
  • Collateral may be at risk: If you take out a secured installment loan, like a mortgage or car loan, for example, your collateral or valuable asset you own will be on the line. The lender will have the right to seize your asset if you default.

The Bottom Line

Installment loans are valuable financial tools. Before you pursue one, however, consider its pros and cons. Also, explore alternative options to make sure you choose the ideal financing solution for your unique situation.

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