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What is an Installment Loan?

What is an Installment Loan?

A traditional installment loan (TILs for short) is when you borrow a specific dollar amount from a lender and you agree to pay the loan back in two parts: a portion of the payment going to the principal, and a portion of the payment going to the interest.

The principal is the amount the person initially decides to borrow, and the interest amount is determined by the loan interest rate.

Installment loans are considered a personal loan and can be for short-term needs, such as an emergency or to make payments on a more immediate need. Like with most loans, installment loans involve an application and certain terms borrowers must qualify for in order to receive the amount they wish to borrow.

These types of loans are radically different than payday loans in many different ways. Generally, TILs are considered better in terms of safety and affordability. With rates that are structured, priced, and regulated, TILs are simply the smarter option.

As an example, Sam takes out a payday loan and gets caught in a “cycle of debt” due to the ballooned costs associated with APRs that are three to ten times higher than TILs. He is forced to refinance the balance of the initial loan, which quickly adds up and puts him in a cycle that is hard to break.

On the other hand, Katelin takes out a traditional installment loan which means she is able to pay it off within a reasonable amount of time. This is because her TIL is fully amortized, and by knowing what payments to expect from month-to-month, she has a clear roadmap out of debt.

Financial Terms and Definitions