My First Car Loan

An installment loan is a great way to secure the money you need for a large purchase, especially when you don't have all the money on hand in cash. However, many people do not fully understand what installment loans are and how they are different from other types of loans. That's why it will help to know the following information about them.

How Are Installment Loans Structured?

Installment loans allow a borrower to gain immediate access to the money that they need and then pay the money back over a set period of time with monthly payments. It is common for installment loans to have a fixed interest rate, which is the average amount of interest that you pay over the course of the entire loan. However, there are many types of installment loans to choose from, including those with variable interest rates that change over the course of the loan.

What Are The Types Of Installation Loans?

You'll frequently see installment loans used for mortgages, auto loans, and personal loans. Any type of loan that is used to purchase a physical asset is known as a secured loan because the asset being purchased can be used as collateral in case the borrower is unable to make payments. Loans that are not used to purchase specific assets are unsecured loans. 

The difference between these two types of loans is that a secured loan typically has a lower interest rate. This is because the collateral is a way for the lender to get their money back by repossessing the asset if you were to default on the loan. Personal loans are more of a risk since they do not have collateral and result in having a higher interest rate. 

How Is The Interest Structured?

Each payment of an installment loan is not an equal amount of principal and interest. Those payments at the beginning are made up of more interest than principal, and the payments near the end are the complete opposite with more principal than interest. This allows the lender to make money from your loan if you were to pay it off early. For example, you may decide to move and get a new mortgage, which will result in paying off your previous mortgage early. 

Do you have more questions about installment loans and how they work? Reach out to a company in your area, such as Time Finance Inc., to learn more.