An installment loan is a type of financing that allows you to borrow a lump sum of money and pay it back in regular payments over an agreed period. This popular type of loan is an essential financial tool commonly used to purchase a car or home or pay education costs — among other things.
CNBC Select explains how installment loans work and what you should know about them to take full advantage of this form of financing.
What you need to know about installment loans
How do installment loans work?
When you take out an installment loan, you borrow a sum of money and repay it in regular installments — hence the name. Usually, the interest rate is fixed, meaning it doesn't change over time. This is different from revolving credit, which lets you continuously pull money from a line of credit up to a maximum limit, normally with variable interest.
An installment loan can be unsecured, which is typical for personal loans, or secured with collateral. For example, Upgrade, one of our top picks for personal loan lenders might let you offer your vehicle as collateral. Plus, the lender works with borrowers with fair credit (FICO scores of 580 to 669). And if you have poor credit (579 or lower), OneMain Financial is a good choice. This lender can also accept an eligible vehicle as collateral.
Accepts applicants with fair credit
OneMain Financial Personal Loans
Annual Percentage Rate (APR)
11.99% to 35.99%
Loan purpose
Debt consolidation, major expenses, emergency costs
Loan amounts
$1,500 to $30,000
Terms
24 - 60 Months
Credit needed
Poor/Fair
Origination fee
$25 to $500 or 1% to 10% of the loan total, depending on your state
Early payoff penalty
None
Late fee
Up to $30 per late payment or up to 15% (depends on your state)
Terms apply.* Click here to see if you prequalify for a personal loan offer.
*You must complete a loan application and continue to meet any criteria used to select you for a loan offer. Not all applicants are approved. Loan approval and actual loan terms depend on applicant's state of residence and ability to meet OneMain Financial credit standards such as a responsible credit history, sufficient income after monthly expenses, and if applicable, availability of eligible collateral.
Not all approved applicants qualify for larger loan amounts, lower APRs, or the most favorable loan terms. For example, larger loan amounts typically require a first lien on a motor vehicle that is no more than ten years old, meets our value requirements, and is titled in applicant's name with valid insurance. APRs are generally higher on loans not secured by a vehicle.
Example Loan: A $6,000 loan with a 24.99% APR that is repayable in 60 monthly installments would have monthly payments of $176.07.
OneMain charges origination fees allowed by law. Depending on the state where the loan is opened, the origination fee may be either a flat amount or a percentage of the loan amount. Flat fees vary by state, ranging from $25 to $500. Percentage-based fees vary by state, ranging from 1% to 10% of the loan amount subject to certain state limits on the fee amount.
For information about these fees and minimum and maximum loan sizes available in certain states, visit omf.com/loanfees.
Current OneMain Customers: Loan offers presented to a consumer assume the individual has no active loan with OneMain or one of its affiliates. If a customer applies for a new loan offer, a OneMain representative will discuss available options.
Active-duty military, their spouse or dependents covered by the Military Lending Act (MLA) may not pledge any vehicle as collateral. If you are covered by the MLA, you are not eligible for secured loans.Loan proceeds cannot be used for postsecondary educational expenses as defined by the CFPB's Regulation Z such as college, university or vocational expense; for any business or commercial purpose; to purchase cryptocurrency assets, securities, derivatives or other speculative investments; or for gambling or illegal purposes.
Time to Fund Loans: Funding within one hour after loan closing through SpeedFunds® must be disbursed to a bank-issued debit card. Disbursement by check or ACH may take up to 1-2 business days after closing.
Here are some common examples of installment loans:
- Personal loan. A personal loan is a type of installment loan you can take out for almost any reason — from debt consolidation to home improvement. While personal loans are typically unsecured, it's possible to find an option that will let you put up collateral to improve your chances of approval or to get a better interest rate.
- Auto loan. A car loan is a secured installment loan. In this case, the car you're buying secures the loan. If you fail to repay the borrowed funds as agreed, the auto lender can repossess your vehicle.
- Mortgage. Similarly, a mortgage is an installment loan secured by the property you're purchasing. Failure to make your mortgage payments can result in foreclosure and possible eviction.
- Student loans. Like other types of installment loans, student loans come with regular payments you make over time. However, they can have fixed or variable interest rates. Often, repayment doesn't start immediately, but interest still accrues during this time.
How to get an installment loan
The exact process to get an installment loan will vary by loan type and lender. Some personal loans, for example, can approve your application and send you money within a day. A mortgage application, on the other hand, is a much more complex process that can take weeks or months.
That said, certain best practices can help you save money no matter what kind of loan you're applying for. Namely, you want to compare offers from different lenders before you apply. Each lender assesses you as a borrower using their own guidelines and requirements, so you're likely to get different terms and rates. Shopping around allows you to pick the most favorable offer and score considerable savings with a lower interest rate, especially if you're borrowing a large amount.
Pros and cons of installment loans
Installment loans let you make purchases without having to have all of the cash on hand, which gives your finances a big boost. For example, few people can buy a home without borrowing money, yet it's one of the most common and reliable ways to build wealth.
At the same time, like any kind of credit, installment loans come with risks and disadvantages. While they shouldn't deter you from seeking credit when you need it, it's wise to be aware of potential pitfalls.
Pros
- Installment loans allow you to pay for large purchases over time.
- With fixed rates and regular payments, you have a consistent repayment schedule that's predictable and easy to budget around.
- If you make installment loan payments on time, they can positively affect your credit.
Cons
- Long repayment terms can result in you paying a lot of money in interest over the life of the loan.
- If you don't have good credit, you're likely to get higher interest rates.
- Missed payments on an installment loan can have a highly negative impact on your credit scores. Remember that late payments stay on your credit report for seven years after you make good on the payment.
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Bottom line
An installment loan can be a convenient financing option that provides an opportunity to pay for a large purchase over time. However, before you apply, make sure the repayment plan fits into your budget to avoid potential missed payments — and losing the asset you're buying. Further, shop around for a lender to get the best terms you can. Know that you have options even if your credit is far from perfect.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every loan guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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