What Is an Installment Loan?
9 Min Read | Published: June 20, 2025
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
What is an installment loan, and how does it work? Understand installment debt to learn if you should take out an installment loan and see alternatives.
At-A-Glance
- Installment loans are a form of closed-end debt where lenders give you an upfront lump sum that you repay with monthly payments for a set time, often with a predictable interest rate.
- Installment loans could be mortgages or personal, auto, and student loans that may or may not require collateral to secure.
- Installment loans could help you finance large purchases and structure your budget for successful debt pay-off, but they could also impact your credit score and aren’t the best option for everyone.
If you’re making car or student loan payments, you may already be familiar with installment loans and not even know it. Unlike a credit card, which is an open-ended form of revolving credit that you can keep using as you pay down the balances, installment loans are closed-end debt, so you typically can’t reuse the credit paying the balance.1 Depending on the purchase, installment loans could save you money on interest, and learning more about installment debt may help you make informed financing decisions.
What Is an Installment Loan And How Does It Work?
Installment loans often have a straightforward process:
- You apply for the loan.
- Depending on the loan, your credit score could play a role in influencing your loan’s terms and interest rate.2
- Upon approval, the lender may provide a lump sum all at once.
- You will pay off the lump sum with scheduled payments, interest, and other associated fees.
Installment loans can be appealing because they often come with a fixed interest rate over a set period, although some may include a variable rate.3 However, depending on the terms, you may have to stick to the stated repayment schedule throughout the loan’s lifespan.
Common Types of Installment Loans
You may recognize some of the common types of installment loans on the market, but not every loan is necessary or right for everyone:
- Personal Loans
You might gravitate toward a personal loan to consolidate debt, finance an essential repair, or plan a wedding. However, you can use a personal loan for just about anything if the terms allow. - Payday Loans
You may be considering a payday loan if an expensive emergency pops up. Just know that these loans can be tremendously risky and often have a short repayment schedule and very high interest rates.4 - Car Loans
Many people may not have tens of thousands of dollars in cash to finance a car outright, so dealerships, credit unions, and banks can offer installment loans tailored to vehicle purchases. - Mortgages
Mortgages are another type of installment loan. Buying a home might be the largest purchase you ever make, so home loans typically use the house as collateral.5 - Student Loans
Student loans are also installment loans, and can help you to pay for college and post-graduate education. - Buy Now, Pay Later Loans
Retailers might offer you a buy now, pay later loan (BNPL) so you can split up the overall price of a purchase over time, typically without paying fees or interest charges.6
Did you know?
Eligible Card Members can use Plan It by American Express® as a payment method to divide up large purchases into a monthly payment with a fixed fee, while still earning rewards.
Secured vs. Unsecured Installment Loans
Secured loans require collateral, like your house or car, in the event that you can’t repay your debts. On the other hand, unsecured loans may not require collateral and securing one could depend more on your credit score, income level, and preexisting debt. Personal and BNPL loans can often be unsecured, while mortgages and car loans typically need collateral.7
Pros and Cons: When Should You Use an Installment Loan?
Like all financial tools, installment loans have pros and cons. Choosing an installment-loan route could work for you, but it may be a matter of timing.
Pros of Installment Loans
Here are some main benefits to consider:
- Predictable fixed interest rates could be lower than other lending products.
- Consistent payment schedules could better accommodate your household’s budget.
- Larger lump sums can simplify big home or car purchases.
Cons of Installment Loans
Here are a few potential downsides of installment loans:
- You may be paying your installment loan for decades or longer.
- Low or fixed interest rates are typical for installment loans but not guaranteed.
- If there’s a market downturn, the fixed interest rate on your loan could end up being above the market rate.8
Can Installment Loans Impact Your Credit?
Since the approval process for a new line of credit may require a hard credit check, you can almost always expect your credit score to temporarily dip slightly after you’ve been approved for an installment loan. However, different installment loans, like BNPL loans, usually have no effect on your credit score when you take one out.9 New installment debt might also diversify your current credit mix, potentially helping to improve your score.10
Here are some other potential credit score impacts to anticipate:
- Because installment loans are closed-ended, paying them off can decrease your total available credit and raise your credit utilization ratio.
- Missed and late payments may negatively impact your payment history, and credit score.
- A new loan could lower your average credit history age, which could have a minor impact on your credit scores at first.
Alternatives to Installment Loans
If you’re looking for an alternative to installment loans, you may want to consider revolving credit. This includes:
- Credit Cards
Credit cards may be a better fit if you keep your balances low, stay mindful of your Annual Percentage Rate (APR), and spend within your means. Paying off your balances in full and on time each month can help you to avoid interest on most purchases, although interest may still apply for some transactions, including cash advances and balance transfers.
To help maximize potential rewards, it could be useful to carefully compare Amex Cards that suit your needs before submitting any applications. - Home Equity Lines of Credit (HELOCs)
A home equity line of credit (HELOC) acts like a second mortgage, letting you borrow against the equity you put into your home to generate a new credit line. Rather than get a lump sum similar to an installment loan, you’d receive a revolving credit line to borrow from and repay over a set period of time. HELOCs often have variable interest rates, which means you could end up paying more than expected each month.11
Frequently Asked Questions
Paying off an installment loan early is possible, but not always advisable. Some installment loan terms may come with a penalty for early pay-offs, so make sure to read and understand your loan’s terms and conditions.
Rarely would you have to accept a loan, even if a lender approves your application. However, applying for loans can often impact your credit score, so you may want to avoid applying for loans you won’t use.
When paying off debt, it may be smart to prioritize the highest-interest loans first. This can help you to save on the amount of interest that you’d overwise have to pay over time.
The Takeaway
Installment loans could be a good option for financing expenses. These loans may help you to schedule consistent payments and create a predictable budget, they could impact your credit in negative and positive ways. It’s a good idea to compare borrowing costs across lending products, from APRs to repayment schedules, to avoid missing a potentially better lending opportunity with credit cards or HELOCs.
1,4,5,6,7,9 “What are installment loans & how do they work?,” Bankrate
2,3,8 “What are Installment Loans?,” Equifax
10 “What Is an Installment Loan?,” Experian
11 “What You Need to Know About HELOCs in 2025,” Experian
Liv Gillespie is a Philadelphia-based writer with a double M.A. in English Linguistics & Literature and Secondary Education. Her work focuses on personal finance.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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