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Table of Contents

What Is an Installment Debt?
Understanding Installment Debt
Special Considerations
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 Pros and
By Julia Kagan
Updated June 14 2021
Review by Khadija Khartit
What is an installment debt?

The term “instalment debt” refers to a loan that is repaid by the borrower over time in installments. The installment debt is typically paid in monthly installments which comprise interest and part of principal. This kind of loan is an amortized loan that requires a standard amortization schedule to be drafted by the lender that outlines the payments throughout the loan’s duration.
The most important takeaways

An installment debt is an installment loan that is repaid in installments over time similar to auto and mortgage loans.
Installment loans are ideal for borrowers since it’s an opportunity to finance high-value itemsand offer lenders regular payment.
Installments loans are generally safer than alternative loans that don’t have installment payments, for example, loans with balloon payments, such as loans or 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

An installment debt is a preferred method of consumer financing for big-ticket items such as homes, cars, and appliances. The lenders also prefer installment loans because it provides a constant cash flow to the issuer through the duration of the term of the loan with regular payments based on a standard amortization schedule.

The amortization schedule will determine the amount of monthly installment debt payment. This schedule was developed by analyzing a variety of variables, including the total principal issued and the interest rate, any down payment, and the total amount of installments.

For instance, not many people are able to afford the price of a home with a single installment. Thus, a loan is granted with a principal that covers the value of the house and is amortized with monthly installments spread over a set time. Mortgage loans are typically structured with an annual payment schedule of 15 years or a 30-year payment schedule. As a result, mortgage borrowers can make steady installment payments throughout the duration of the loan that help enable home purchases to be less expensive.

However, an appliance that costs $1,500 can be repaid over the course of a year for most people. The buyer can further reduce the monthly installments by making a large down payment of $500, for instance. If we assume an interest rate of 8 percent, the monthly payments for a year would be around $87. This means that the total cost of financing over the one-year period is around $44.

However when the buyer does not have the resources to pay a downpayment 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 cost of financing, in this instance is slightly higher at $66.

Installments loans are typically safer loans than loans with no installment payments.
Special Beacons

The installment loan is among the oldest loan products that lenders offer. The lender can design a typical amortization plan and get monthly cash flow from both principal and interest payments on the loans. Additionally, high-quality loans are able to be considered suitable loans with certain protections, as well as providing the possibility of sale on the secondary market, which increases a bank’s capital.

Installments loans are generally lower risk than other alternative loans which do not require installment payments. These loans may be loans with balloon payments loans and interest-only loans. These alternative loans are not governed by a the traditional amortization schedule, and have greater risk than standard installment loans.
The types of installment debt

Classic loans by financial institutions to cars and homes are a major source of lending business for lenders. A majority the loans are constructed on a conservative underwriting model with typical amortization schedules which reduce principal and interest every installment.

Alternative installment debt loans are also provided by a variety of higher-risk alternative lenders on the market for credit. Payday loans are a prime example. They have higher interest rates, and they base the principal offered on a lender’s employer and on a per-paycheck income. The loans will also be paid with installments based on an amortization calendar however, their fundamental components involve much higher risks.

In 2014 the Dodd-Frank Act instituted legislation for qualified mortgages. This gave lending institutions greater incentives to structure and issue higher-quality mortgage loans. The standard installment terms of repayment are one prerequisite for mortgages that qualify. In addition, as a qualified mortgage loan it is eligible for certain protections and can be more attractive to lenders in the second market loan products.
Installment Debt vs. Personal Loans

The term “instalment” refers to a loan is a kind of financial vehicle that allows a lender to be paid back in installments versus one payment. For example, a mortgage payment is an installment loan that is repaid by the borrower in monthly installments which comprise interest and principal. Federal loans for mortgages and education are two kinds of typical installment loans. A installment debt is a sum of money owed for any installment loan.

A installment loan is a type of personal loan However, there are many different types of personal loans, including payments repaid in full with interest rather than in installments. A personal loan can come from a bank, a credit union, your boss, or a family member.
Advantages and Disadvantages of Installment Debt

Like every loan that you take out, there are pros and disadvantages of taking on installment debt. For instance, if want to buy a house, using an installment loan is a fantastic option to take out a large amount of money and then repay it over time. However in the event that you don’t like the thought of having to deal with long-term debt, then borrowing and then paying off a personal loan over in full could be more appealing.

An installment debt is paid off on an established schedule by the lending institution. An installment loan allows you to plan your monthly budget while you pay back your loan.

In certain instances, if you’ve signed up to pay your loan off using installment payments, you will be penalized in the event that you choose not to repay it before. In addition that, installment loans are costly to pay off, making them an obligation to pay.
Pros

Installment loans allow the borrower to pay back their loan over time.

Installment loans provide a way to borrow large sums of money to buy big costly items, such as a home.

Installment debt is usually monthly a fixed amount which makes it simpler on your budget.

Cons

The interest rate on installment debt is typically high , which makes it difficult to pay it off in one lump sum.

Installment debt also includes interest, which adds up over the years.

Some lenders may charge a penalty fee, in the event that you pay off the loan in total.

The Bottom Line

The term “instalment debt” refers to a form of loan that is repaid by the person who is borrowing it in regular, typically monthly installments that contain the interest due plus some of principal.

An installment debt is an amortized loan and is characterized by a typical amortization plan created by the lender which informs the borrower of the amount they will owe over the course of the loan. Student and mortgage loans are typically types of installment debt that allow borrowers to gain access to large sums of money. An installment debt is less risky than borrow large amounts that must be paid in full with interest in short periods of time.
Installment Debt FAQs
What is An IRS Installment Contract?

The IRS installment agreement allows you in order to repay the IRS via installments any taxes you owe.
What is the amount of interest that the IRS charge on Installment Agreements?

The IRS has a penalty of one-half of a 1 % rate on taxes unpaid up to 10 days. After that, the interest increases to 1%, but “if the taxpayer files their return on time and you request an installment agreement, the one-half of 1 percent rate is reduced to one quarter of 1% in any month in which an installment agreement is in effect,” according to its website.1
What Is an Installment Sale?

The term “instalment sale” refers to the sale of property that results in at least one payment beyond the tax year for the sale. However, installment sale rules do not apply if you sell your property at an loss.2
What happens if you don’t Pay Your Installment Then what happens to your loan?

Like every loan in the event that you don’t pay what you owe, you may find yourself in financial difficulties. If you default on your mortgage, for instance, you can end up losing your property. In addition, if you do not pay the installment loan, the fees, interest, and potential penalties will rise. By not paying your loans you could damage your credit, as well.
How do you get an Installment Loan With Bad Credit?

It is possible to qualify for an installment loan with bad credit but you’ll be charged a higher interest rate on the loan if your credit is less than 600. If you look around for the loan and be able to get one, even if your credit is classified as “bad” according to one of the “big three” credit bureaus.3 However, you may not be eligible for mortgages, which are a type of installment loan that is available to those with credit scores below 550.4
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Related Terms
What Is an Amortization Schedule? How to Calculate With Formula
A schedule for amortization is a complete schedule of blended loan payments that include the amount of principal as well as how much interest.
More
What Is an Amortization Schedule? How to Calculate with Formula
Amortization is an accounting technique that is used to reduce the value of the loan or intangible asset for a specified period of time.
More
What is a mortgage? Types, the way they work and examples
A mortgage is a loan that is used to buy or keep real estate.
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Amount to be Financed
The amount financed is the total amount of credit that is granted to an applicant for a loan that is also the principle of a loan that is the basis on which interest calculated.
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Nontraditional Mortgage
Nontraditional loans are a general definition for all mortgages that do not match the typical characteristics of a mortgage.
more
Deferred Interest Mortgage
A deferred-interest mortgage allows the borrower to put off the payment of a portion or all of the interest on a loan, resulting in lower payments over an agreed-upon period of time.
more
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