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What Is an Installment Payment?

Repayment on student loans generally begins shortly after graduation.
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  • Written By: B. Miller
  • Edited By: Andrew Jones
  • Last Modified Date: 16 July 2014
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An installment payment is a monetary payment made on a loan that has been disbursed. It is a periodic payment that is typically of a predetermined amount that includes a percentage of interest as well as a percentage of principal. There is the potential for the amount of an installment payment to vary if the loan itself has a variable interest rate, which is common on some mortgages or student loans.

An installment payment is a common type of repayment plan for many loans. Auto loans, home mortgages, home equity loans, or student loans are typically installment loans. This means that the borrower often receives a statement with the number of installment payments remaining on the loan. For example, a five-year auto loan will consist of 60 installment payments of equal amount, or one installment payment per month.

By paying a little extra on the predetermined payment amount, it is often possible to pay off the loan in an even shorter period, but it is important to read the fine print and determine whether or not there is a prepayment penalty. This is not common, but it does happen. In most cases, a loan with a fixed interest rate will have an installment payment that remains the same throughout the life of the loan, unless a different type of payment plan was arranged with the lender. Loans with variable interest rates will, naturally, cause the monthly payment amount to vary as well.

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An installment loan differs from a revolving line of credit because a revolving line of credit may be paid off and used over and over again, and the payment amount will be based on the monthly balance. In an installment loan, the installment payment is based on the initial amount of the loan plus interest that will accrue over the life of the loan. In some installment loans, equal amounts of principal and interest are paid in each monthly payment, but other loans start off with more going toward interest and less going toward principal each month.

Over time, this ratio will be reversed, until all the interest is paid off, and the entire payment goes to the principal amount. This will be specified in the loan documentation. Installment loans are beneficial for a number of reasons, but primarily because they will typically not cause any surprises; it is easy for borrowers to plan for the installment payment in a monthly budget.

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Discuss this Article

Mykol
Post 8

One big advantage to having a fixed interest rate on an installment loan is you have no surprises when it comes to payments and interest. This is not the case if you have a variable interest rate.

I try to use tools such as an amortization schedule and installment loan calculators to help me determine what the next months interest payment is going to be.

If I can pay my regular monthly payment plus the next months interest payment, this will significantly reduce the amount of total interest I will pay and I can pay off the loan much sooner.

andee
Post 7

Anytime I am on any kind of installment payment plan, I always try to pay a little bit extra every month. Some months this can be hard to do when you are making payments on a mortgage, car and student loan.

I often use an online loan repayment calculator that shows me how much I am paying in interest if I don't pay any extra for the entire life of the loan. This can be quite staggering when you think about it, and is good motivation for me to pay as much extra as I can afford.

Sara007
Post 6

Always read your installment payment contract very carefully or you could be in for some unpleasant surprises. If you miss a payment your interest rate can skyrocket. Also, some low interest rates can also expire during the period of your payments, so it is good to know in advance when your bills are going to start climbing.

One of things that surprised me most when I actually sat down and started reading about the installment payments I had been offered were how many rent-to-own places use your credit rating to determine the interest rate you receive. Don't always assume that just because you have been approved for an installment payment that the interest rate you're getting is the one advertised.

popcorn
Post 5

I think buying something for your home should only be done on an installment payment if you are hurting for cash and really don't want to wait. I think too many people are swayed by the promises of low-interest and long installment payment terms. These sound like good ideas until you realize you'll be paying for that new television for the next 5 years. More than likely you'll be paying for it past its replacement time.

I have always been a believer in not buying what you can't afford. Installment payments really go against the grain for me.

Has anyone ever bought something on an installment payment that actually helped them save money?

suntan12
Post 4

@Mutsy - I think that some people will finance anything just to have what they want. I know that owing money can be stressful especially if you owe it to the IRS. I know that there are many people that have an IRS installment payment plan, but to be honest I would not be able to sleep at night if I owed money to the IRS.

They can garnish your wages and even put you in jail for owing money on your taxes. I personally think that I would rather take out a personal loan at my credit union and pay back the IRS immediately if I were in these people’s shoes and just be done with the IRS.

Owing money to the credit union does not seem so bad, but I would not want to imagine owing money to the IRS.

mutsy
Post 3

@Latte31 - Good for you! I bet that was a relief. I just wanted to say that I was recently looking to buy a car and was considering buying a used car. When I looked at the interest rates, the used car was actually more expensive to purchase than the new car even though it cost less.

I guess the thinking is that the used car is riskier because it might break down or have substantial mechanical problems. I decided to stick with a new car because I was also afraid of the maintenance issues and I really didn’t want to pay a higher interest rate on my loan, nor did I want to extend the loan either.

The dealer was even telling me that there were car loans available for up to 72 months. That seems incredible to me. I can’t believe that someone would finance a car for six years. The most that I finance my car for is 48 months and I usually try to stick with the 36 month time frame. I guess if you are buying a really expensive car then maybe the additional timeframe might be worth it.

latte31
Post 2

@Crispety - I agree with you. I know that during the holidays there are a lot of offers like that on big ticket items like television sets, but I don’t bother with it.

If I can’t pay if off my purchase at the end of the month, I don’t buy it. I wanted to add that a mortgage loan calculator is great to look at when you are considering buying a home.

There are a lot of web sites that offer amortization tables so you can see when you will be able to pay off your mortgage. I used a mortgage payment calculator and printed out the amortization tables and posted it on my fridge because I was determined to pay off my home before my daughter was born.

My husband and I successfully accomplished that goal and I was only 32 at the time. I think that if you use these loan calculators right, you will be surprised at how quickly you can pay off your debt.

You will also realize the amount of interest that you are paying on your mortgage which over a thirty year mortgage is like paying for the house twice.

I read somewhere if you make one extra payment a year, you will shave twelve years off your mortgage on a thirty year mortgage. Imagine what you could with sending some extra money every month.

Crispety
Post 1

I know that a lot of retailers use a loan payment calculator when determining the minimum payment due on high ticket item purchases. A lot of these stores will offer financing for twelve to thirty-six months but usually the interest rate is really high.

I was lucky that when I bought my living room furniture I was able to take advantage of the zero percent interest loans for the first twelve months. This is really smart for a retailer to offer these payment options to customers because it really sweetens the deal and takes most of the customer’s objections away.

I made sure to pay off my furniture within the twelve months because if not the interest would accrue at that point and I think the rate was 24% which is a little ridiculous.

I know that sometimes a company will eliminate all payments for the first year, but that is really not as good as it sounds because when the year is up not only do you have to start making these payments from the beginning, but you also have the accrued interest to deal with which makes this type of financing deal a bad one in my opinion.

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