What Is an Installment Loan? A Simple Guide to Installment Loans

what is an installment loan

Unexpected expenses can pop up out of nowhere, leaving you feeling frustrated and worried. How will you pay these bills? What should you do?

The solution to unexpected expenses that you cannot afford is installment loans.

Are you asking yourself, “what is an installment loan?”

If so, you can benefit by learning more about these installment loans.

Check out this simple-to-understand guide if you’re wondering what installment loans are and how they work.

It Provides a Lump-Sum of Cash

Installment loans have several features that set them apart from other kinds of loans. The first feature of an installment loan is the way you receive the proceeds.

When you apply for an installment loan, the lender reviews your application and approves you for a specific amount. After the approval, you receive the proceeds in the form of a lump-sum payment.

Once you receive the money, you can use it to pay your bills. You can actually use the proceeds in any way you desire. There are no restrictions on how you can use the cash, and you can check these sites to understand this in more detail.

You Repay It Through a Series of Payments

The second feature of an installment loan is the way you repay the money you borrow. All installment loans work the same way.

You receive the proceeds, and the lender sets up a repayment plan. This plan consists of making payments on the loan. Your payments are all equal, and your lender will tell you how many payments you have.

If you borrow a small amount, you may only have a few payments. If you borrow a lot of cash, you may have payments for a year or longer.

Each Payment Includes Principal and Interest

Each payment you make consists of two things. The first thing is the principal, and the second is interest. The lender divides your payment amount into these two categories.

The money applied to the principal reduces your loan balance. The money applied to interest is the cost of taking the loan. Lenders call this process amortization.

You Can Pay It Off Early If You Wish

The last thing to know is that you can pay off the loan early if you wish. If you receive a windfall of cash and want to pay off the loan, you can.

By paying it off early, you can save money on interest charges. Paying it off early also allows you to skip the rest of your payments.

Before you do this, though, make sure that the lender does not charge a prepayment penalty. Most lenders don’t, but it’s always a good idea to ask first.

“What Is an Installment Loan?” Find the Answers You Need

Do you have further questions about, “what is an installment loan?” If so, you can search for more answers and information on our other articles about installment loans. 

You can learn more by reading our blog, too, as we provide a lot of helpful, insightful articles to help you learn everything you need to know about installment loans. Visit the Finance section of the Everything Entrepreneur Blog right now to learn more about loans!