An installment loan is an agreement you make with a creditor to borrow a certain amount of money and repay it in equal monthly payments, or installments, for a set period of time. The length or term of the loan could be very short or in excess of 30 years and may be secured or unsecured.
Secured loans are backed by collateral, which is something of value that you pledge to the lender. For instance, a car you finance is collateral for the car loan. And a house is collateral for a home loan, which is also known as a mortgage. Collateral protects lenders because they can sell it to repay your debt if you don’t make payments as agreed.
Unsecured loans are not backed by any collateral. They’re often called personal or signature loans because you sign an agreement where you promise to repay the debt. For instance, credit card debt and student loans are both forms of unsecured loans.
When you take an installment loan, your monthly payment will depend on three factors:
Principal amount: The less you borrow, the lower your monthly payment will be.
Interest rate: The lower the rate, the lower your monthly payment will be.
Loan term: The longer the term, the lower your monthly payment will be; however, this generally results in paying more total interest.