What Are Installment Loans?

An installment loan lets you borrow a fixed amount of money and repay it through regular payments over a set period.

Each payment goes toward the amount you borrowed, interest and any applicable fees.

Personal loans, auto loans and some types of financing can all work as installment loans.

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How Do Installment Loans Work?

You receive an agreed amount of money from a lender.

You then repay the loan through scheduled installments.

For example, suppose you borrow $5,000 for three years.

Your lender calculates your payment based on factors such as:

• The amount borrowed
• The interest rate
• The length of the loan
• Applicable fees
• How frequently payments are made

You continue making payments until the balance is fully repaid.

Personal installment loans in Canada commonly range from $100 to $50,000 and may have terms between 6 and 60 months. The exact amount and term depend on the lender.

What Is an Installment Payment?

An installment is one of the scheduled payments you make toward a loan.

Payments could be:

• Weekly
• Biweekly
• Monthly

The schedule is established in your loan agreement.

Your payments continue until the full amount of the loan, interest and applicable fees have been repaid.

What Are Examples of Installment Loans?

Several common borrowing products use installment payments.

Personal loans

A personal loan usually gives you a lump sum upfront.

You then repay it over an agreed term.

People may use personal loans for:

• Home renovations
• Car repairs
• Moving expenses
• Furniture
• Unexpected expenses
• Debt consolidation

Personal loans are also sometimes called installment loans or consumer loans.

Auto loans

A car loan is another common type of installment loan.

You borrow money to purchase a vehicle and repay the debt through scheduled payments.

The loan may be arranged through a financial institution or through financing offered at a dealership.

Secured loans

Some installment loans require collateral.

Collateral is an asset that helps secure the loan.

A vehicle could be used as collateral for certain loans.

If you fail to repay a secured loan, the lender may have the right to take the asset.

Buy now, pay later financing

Some purchases can also be divided into installment payments.

A buy now, pay later plan allows you to finance a purchase and repay it over time.

The agreement may include an interest rate, fees and a specific number of payments.

Secured vs. Unsecured Installment Loans

Installment loans can be secured or unsecured.

Secured installment loan

A secured loan requires collateral.

This reduces some of the lender's risk.

The lender may be able to take the collateral if you do not repay the loan.

Unsecured installment loan

An unsecured loan does not require collateral.

The lender instead relies more heavily on factors such as your:

• Income
• Credit history
• Existing debt
• Ability to repay

Because there is no collateral, unsecured borrowing may have a higher interest rate depending on your financial situation.

Do Installment Loans Have Fixed Payments?

They often do, but not always.

A fixed-rate installment loan generally has more predictable payments because the interest rate does not change during the agreed term.

A variable-rate loan can become more expensive if the interest rate increases.

Before accepting a loan, check whether the rate is fixed or variable.

Federally regulated lenders must disclose information such as the loan amount, interest rate, payment amount, term and applicable fees when you get a personal loan.

How Is Interest Charged on an Installment Loan?

Interest is the cost of borrowing the money.

Your interest rate affects how much you repay overall.

For example, two people could borrow the same amount for the same length of time but pay different total amounts if one receives a higher interest rate.

Your rate may depend on:

• Your credit history
• The lender
• Whether the loan is secured
• Your income
• Your existing debts
• The loan term

A higher interest rate generally means a higher total borrowing cost.

Does a Longer Loan Term Lower Your Payments?

Usually.

Spreading the loan over more months can reduce each individual payment.

However, a longer term may cause you to pay more interest overall.

For example, the Financial Consumer Agency of Canada illustrates a $2,000 personal loan at 19.99% with total costs increasing as the repayment period extends from 12 to 60 months.

A smaller monthly payment does not necessarily mean the loan is cheaper.

Always check the total repayment amount.

What Is the Difference Between an Installment Loan and a Line of Credit?

The main difference is how you receive and repay the money.

With an installment loan:

• You usually receive a fixed amount upfront
• You follow a repayment schedule
• The loan ends after the balance is repaid

With a line of credit:

• You receive an approved credit limit
• You borrow only what you need
• You can usually borrow again as you repay the balance
• The account can remain open

An installment loan can make more sense when you know exactly how much money you need.

A line of credit can provide more flexibility when the amount you need is uncertain.

Installment Loan vs. Payday Loan

Installment loans and payday loans are not the same.

A typical installment loan is repaid through multiple scheduled payments over a longer period.

A payday loan is designed for short-term borrowing.

In Canada, payday loans can generally be for up to $1,500 and may have a repayment period of up to 62 days. They are considered an expensive way to borrow money.

Installment loans can also be expensive, especially when the interest rate is high.

Compare the total cost of either product before borrowing.

Can You Get an Installment Loan With Bad Credit?

Possibly.

Every lender has its own qualification requirements.

Having weaker credit may result in:

• Fewer lenders willing to approve you
• A smaller loan amount
• A higher interest rate
• A requirement for collateral

Do not focus only on whether you can get approved.

A loan with a very high borrowing cost can create additional financial pressure.

Do Installment Loans Affect Your Credit Score?

They can.

Some lenders report installment loans and payment activity to the credit bureaus.

Making your payments on time can contribute to a positive payment history.

Late or missed payments can hurt your credit.

Applying for a loan may also result in a hard credit inquiry.

Can You Pay Off an Installment Loan Early?

Sometimes.

Some lenders allow additional payments or let you repay the entire loan early without a penalty.

Other loan agreements may include restrictions or fees.

Check your agreement before making a large early payment.

The ability to repay early can help reduce the amount of interest you pay.

What Should You Check Before Getting an Installment Loan?

Before accepting a loan, review:

• Amount borrowed
• Interest rate
• Payment amount
• Payment frequency
• Loan term
• Fees
• Total repayment amount
• Fixed or variable interest
• Late payment consequences
• Early repayment rules
• Collateral requirements

The total cost is particularly important.

A loan with a low monthly payment can still be expensive when payments continue for several years.

Are Installment Loans a Good Idea?

An installment loan can make sense when you need a specific amount of money and want a structured repayment schedule.

It may be useful for a large necessary expense that you cannot comfortably pay for upfront.

It may be less suitable if the payments do not fit your budget or the interest rate makes the loan excessively expensive.

The main thing to remember is that an installment loan gives you money upfront and creates a defined repayment plan. Make sure the full cost of that repayment plan fits your budget before accepting the loan.