What is the Difference Between a Personal Loan and an Installment Loan?

 In Financial Wellness

There are so many types of loans out there, it’s no surprise that many people ask what makes them different. How do you know which type of loan is right for you? Understanding the difference between loan types—such as a personal loan and an installment loan—is a good first step in becoming more conscientious about your finances and managing your money.

Personal loans are defined by a set loan amount, a set loan term, and a set monthly payment. They are not defined by what they are used for. Based on that definition, an installment loan is technically a type of personal loan.

Let’s take a look at the definitions of personal loans and installment loans before we branch into common or frequently asked questions about these two types of loans.

What is a Personal Loan?

Personal loans are one of the most common types of loans available. They are also very widely used and millions of people in America and around the world take out personal loans.

A personal loan is a loan with money borrowed from an online lender, credit union, or bank. You pay personal loans off through fixed monthly payments, usually over the course of several years.

Personal loans typically aren’t backed with collateral, so they are termed “unsecured” in that respect. What this essentially means is that when you take out a personal loan—which can be any amount ranging from $1,000 to $50,000, depending on your lender—it’s not secured by anything of monetary value. Whereas if you take out a mortgage or an auto loan, your loan is backed by your home or car.

What are Personal Loans Used For?

Personal loans have set terms for how much money has to be paid back in a certain amount of time, but you can use the money for just about anything.

People take out personal loans for any number of reasons, including (but not limited to):

  • Improve Credit: If you’re approved for a personal loan and you keep your terms of the loan agreement by paying it off on time, your credit score will improve.
  • Finance Home Makeover Projects: Is it time to redo your kitchen but you lack the funds on hand to finance it? Use a personal loan.
  • Pay off Credit Card Debt: You can take out a personal loan to consolidate various credit cards and other payments into one, easily managed bulk payment.
  • Medical Emergencies: Emergencies happen. Personal loans can finance moments you weren’t expecting financially.
  • Travel Emergencies: If you need to book a quick flight but don’t have the credit limit to handle the expense, a personal loan could be your solution.
  • Pay for School: Students can take out personal loans to pay for school.
  • Start a Business: Personal loans can be used to pay for that side business you know will make it big, but you just don’t have the funds to start on your own.

Is a Personal Loan an Installment Loan or Revolving Credit?

A personal loan is also known as an installment loan where increments of payments are due at set times for a set number of months or years. Revolving credit is different from any type of installment loan for the following reasons:

  • Lacks Set Loan Amount: Rather than a loan amount, a business or individual with revolving credit has a credit limit or max amount of money they can borrow and use.
  • No Fixed Interest: Interest rates on revolving credit will vary.
  • No Set Monthly Payment: You’ll instead likely have a minimum payment due based on the amount borrowed.
  • No End Date: You’ll have a revolving credit line open as long as you’d like, so there’s really no end date to the loan.

What is an Installment Loan?

Completing a Loan

As mentioned, an installment loan is a specific type of personal loan. When you take out an installment loan, you agree to make fixed, regular payments for the length of the loan term. Installment loans also come with interest rates. So, when you take out the agreed-upon amount you’ll be borrowing, you’ll end up paying that initial amount back with added interest rates on top of it.

Types of Installment Loans

There are many types of loans that qualify as installment loans, including types of loans that are needed for short-term monetary needs, such as:

  • Debt Consolidation Loans: Too many debts and payments piling up? Take out a personal installment loan to consolidate your debts into one easy, manageable payment.
  • Auto Loans: If you can’t afford that car upgrade you desperately need, take out an installment loan to pay for it.
  • Mortgage Loans: Pay off your installment loan on your house with regular, consistent payments.
  • Student Loans: Installment loans are a good option for financing higher education.

You’ll notice that many of the types of loans above are similar to the reasons you’d choose to take out a personal loan. This is because, as we’ve said, installment loans are a type of personal loan categorized by regular payments known as “installments” that go toward the total borrowed amount.

Is a Small Business Loan an Installment Loan?

You can get an installment loan as a small business loan, often with a fixed interest rate. But there are other types of small business loans available, including line-of-credit loans, interim loans, etc.

Is a Payday Loan an Installment Loan?

Payday loans are not installment loans. The main difference between the two is the amount of time you have to pay the loan back. With an installment loan, you have months or even years—depending on your lender—to pay back your loan in increments. With a payday loan, you also have a set due date for your payment (typically your next payday), but it is a single lump payment, paying back the original price borrowed and the additional fees and interest accrued.

Is a Payday Loan an Installment Loan or Revolving Credit?

A payday loan is neither an installment loan or revolving credit. Where an installment loan is a type of personal loan where payments are made in fixed increments for a set period, payday loans are usually to be paid back in one lump sum—original loan price and interest included—at a set date.

Revolving credit has a maximum amount of credit that can be borrowed and paid back over and over again with no set termination date. Payday loans are expected to be paid back one way or another in full.

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