Table of Contents

What is an Installment Debt?
Understanding Installment Debt
Special Beacons
Types of Installment Debt
Installment Debt vs. Personal Loans
Advantages and disadvantages of Installment Debt
The Bottom Line
Installment Debt FAQs

Personal Finance Loans

Installment Debt: Meaning, Types, Pros and Cons
By Julia Kagan
Updated June 14 2021
Reviewed by Khadija Khartit
What Is an Installment Debt?

The term "instalment debt" refers to an installment loan which is paid back by the borrower over time in installments. In general, an installment debt is repaid in equal monthly payments that include interest and some of principal. This type of loan is an amortized loan that requires a regular amortization plan to be developed by the lender that outlines the all the payments over the duration of the loan.
Key Takeaways

An installment debt is an installment loan which is paid back in regular installments, such as most automobile and mortgage loans.
Installment loans are ideal for borrowers since it's an opportunity to finance high-value products, and also offer lenders regular payment.
Installments loans are typically safer than alternative loans which do not require installment payments, for example, the balloon payment loans and interest-only loans.
An installment loan could be a kind of personal loan.
Your amortization plan determines the amount you will pay in monthly installment debt payments.

Understanding Installment Debt

A installment debt is a popular way of financing for expensive items like houses, cars, and appliances. In addition, lenders favor installment debt since it offers a steady cash flow for the issuer through the duration of the loan with regular payments that are based on a typical amortization schedule.

The amortization schedule will determine the amount of monthly installment debt payment. This schedule was designed using a number of factors, including the total principal issued and the interest rate as well as any down payment and the total number of payments.

In the case of home loans, not everyone could afford to pay the price of a home in one payment. Thus, a loan is granted with a principal covering the home's value and is amortized using monthly installments spread over a set time. Mortgage loans are typically structured with the 15-year payment plan or a 30-year installment plan. As a result, mortgage borrowers can make steady installment debt payments over the course of the loan which can help make buying a house cheaper.

However the cost of an appliance which costs $1,500 can be repaid in a year by most people. Buyers can also reduce the monthly installments by making a substantial down payment of $500, as an example. In this case, assuming an interest rate of 8%, the equal monthly payments over one year would be approximately $87. This means that the total financing cost for the entire year is approximately $44.

However when the buyer is unable to come up with the funds for a down payment and can finance the entire $1,500 price of the appliance for one year at 8% then the monthly payment would be $130.50. The total financing cost, in this case, is a little higher at $66.

Installments loans are often lower risk loans than loans that do not require installment payments.
Special Beacons

A installment loan is among the most traditional loan products provided by lenders. They can create a standard amortization schedule and earn each month a cash flow from both principal and interest repayments on loans. Furthermore the best loans can be considered suitable loans with certain protections, as well as giving the chance to sell in the second market. This can increase a bank's capital.

Installments loans are generally safer than alternative loans that do not have installment payments. These loans may include the balloon payment loans or interest-only loans. These types of loans are not governed by a the traditional amortization schedule, and are issued with an increased risk than regular installment loans.
Types of Installment Debt

The traditional loans provided by banks for cars and homes are a prominent source of lending business for lenders. Most are loans are built on conservative underwriting and regular amortization schedules that pay down principal and interest each installment.

alternative installment loans are also provided by a wide range of high-risk alternative lenders on the marketplace of credit. Payday loans are a prime example. They are charged higher interest rates, and they base the amount of principal offered on the borrower's employer and per paycheck income. The loans can also be paid in installments that are based on an amortization plan; however, their underlying components are associated with higher risk.

In 2014, in 2014, the Dodd-Frank Act instituted legislation for qualified mortgages. This gave lending institutions additional incentives to structure and issue higher-quality mortgage loans. The standard installment terms of repayment are one requirement for qualified mortgages. In addition that, as an approved mortgage loan it can be protected by certain rules and can be more attractive to underwriters in markets that are secondary to loan structure.
Installment Debt vs. Personal Loans

A installment loan is a kind of financial vehicle where a lender has agreed to repay the loan in installments instead of one payment. For example mortgage payments are an example of an installment loan which is paid back by the borrower in monthly installments that comprise principal and interest. Federal loans for mortgages and education are two common installment loans. An installment debt is the amount due on an installment loan.

The installment loan is a kind of personal loan However, there are other kinds of personal loans that are repaid in full, with interest, instead of in installments. A personal loan can be obtained from a financial institution, a credit union, your boss, or a member of your family.
Advantages and Disadvantages of Installment Debt

Like any loan that you take out, there are pros and disadvantages of taking on an installment loan. For instance, if you are looking to purchase a home and need to pay for it with an installment loan is an excellent way to borrow a large amount of money and repay it over time. However in the event that you don't like the idea of being in long-term debt, then borrowing and then paying off a personal loan to the full amount could seem more appealing.

A debt that is a installment will be paid off on an established schedule by the loan provider. An installment loan allows you to plan your cash each month as you pay back your loan.

In certain instances, if you've signed up to pay your loan in installments You will be assessed a penalty if you decide not to repay it before. Additionally the installment loans take time to pay back, which makes them an investment in your finances.
Pros

Installment loans allow the borrower to repay his loan in time.

Installment loans offer a means to obtain large amounts of money to purchase big ticket items like a home.

Installment debt is usually an amount that is fixed each month which makes it simpler on your budget.

Cons

Installment debt is usually very high making it difficult to pay it off in one lump sum.

Installment debt includes interest, that adds up over years.

Certain lenders might be charged a penalty if you pay off the loan in the full amount.

The Bottom Line

The term "instalment debt" refers to a form of loan which is paid back by the borrower in regular, often monthly payments , which include the interest due plus some of the principal.

The term "instalment debt" refers to an amortized loan and is characterized by a typical amortization schedule created by the lender, which informs the borrower of the amount they'll be liable for over the life of the loan. Mortgages and student loans are often forms of installment debt and let borrowers gain access to large amounts of money. An installment debt is safer than borrowing large amounts that must be paid fully and with interest within a short amount of time.
Installment Debt FAQs
What Is An IRS Installment Contract?

A IRS installment agreement is a method to pay the IRS by installments any tax you owe them.
What is the amount of interest that the IRS Charge for Installment Agreements?

The IRS charges one-half of a 1% rate for taxes that are not paid up to 10 days. After that, the interest increases to 1%, but "if it is filed your tax return on time and you request an installment agreement, the one-half of 1 percentage rate will be reduced to one-quarter of 1% for any month that there is an installment contract in effect," according to its website.1
What is an Installment Sale?

A installment sale the sale of property in which you receive at least one installment beyond the tax year for the sale. However, the rules of an installment sale aren't applicable in the event that you sell your home at the cost of a loss.2
What happens if You Can't Pay the Installment Loan?

Like any loan in the event that you don't repay the amount you owe, you can find yourself in financial trouble. If you are in default on your mortgage for instance, you can be forced to sell your house. In addition, if you do not pay the installment loan the charges in addition to interest and penalty charges could increase. If you don't pay your loans you could damage your credit, as well.
How do you get an Installment Loan with Bad Credit?

It is possible to get an installment loan with poor credit, but you find yourself saddled with higher interest rates on the loan in the event that your credit score is below 600. If you shop around for an loan, you may be able to get one, even if your credit score is considered "bad" in one or three "big three" credit bureaus.3 But, you might not be able to get a mortgage, which is a type of installment loan which is only available for those with a credit score less than 550.4
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Related Terms
What Is an Amortization Schedule? How to Calculate With Formula
A schedule for amortization is a comprehensive schedule of blended loan payments showing the amount of principal as well as the amount of interest.
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What is an amortization schedule? How do you calculate using Formula
Amortization is an accounting method that is used to reduce the value of a loan or other intangible asset for a specified time.
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What is a mortgage? Types, the way they work, and Examples
A mortgage is an loan used to purchase or keep real property.
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Amount Financed
The term "amount financed" refers to the sum of credit extended to a borrower in exchange for an loan that is also the principle of a loan on which interest is calculated.
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Nontraditional Mortgage
Nontraditional loans are a general term for all mortgages that do not meet the standard requirements for mortgages.
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Deferred Interest Mortgage
A deferred-interest mortgage allows the borrower to put off paying some or all of the interest on a loan, resulting in smaller payments for an agreed-upon period of time.
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