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What Are Installment Loans and How Do They Work
An installment loan is a loan in which the act of repaying the funds borrowed plus any interest associated with the loan is broken into equal installment payments over time. Each installment consists of both principal (a portion of the amount borrowed) and interest. These amounts adjust as the loan is paid down where a larger portion of each successive payment is applied to the remaining principal balance.
Installment loans are helpful for businesses and individuals who need to manage the financial challenge of purchasing items or services that may not be affordable without a loan. Many Americans use financing plans to help buy a car, furniture or an appliance. A business may use an installment loan to finance an expensive, but necessary, item to continue to operate or grow their business. An installment loan may also be used to help cover emergency expenses, or an immediate cash need.
If either a person or a business has a need for cash immediately, they may not be able to afford it. The act of paying the full cost upfront might also drain funds needed to support other important activities and end up increasing financial stress in other parts of their life.
Installment loans can vary greatly in the loan amount, interest rate and lender characteristics. Because an installment loan is purely a type of loan that is paid in “installments”, many types of loans with monthly repayment terms fall within the installment loan definition. Banks, credit unions and independent online lenders like Jora offer installment loans. If you find yourself in an emergency and are unable to get a quick loan from your bank or credit union, a high interest installment loan with Jora may be a good option for you.
By spreading out the larger cost into payments over time, installment loans can make purchases more manageable.
How Do Installment Loans Work?
Suppose you apply and get a loan for $5,000. In this example, let’s say the loan has interest with an Annual Percentage Rate (APR) of 10%. Let’s also say the agreement is to pay the loan back in one year in 12 monthly installments.
- Your principal (the amount borrowed) you need to pay back is $5,000
- Your monthly interest due is calculated as a percentage of the current principal balance. As you pay your loan principal down each month, the amount you pay in interest with each successive payment will reduce as well
- Therefore, on a $5,000 loan, the total (principal + interest) you are required to pay back by the end of the loan period is $5,274.95
Once you make the 12 on-time monthly payments you will have repaid the loan.
How Are Installment Loans Different Than A Payday Loan?
An installment loan differs considerably:
- Payday loans are usually paid back in a shorter period of time. The entire amount borrowed plus interest is often times due on the borrower’s next payday.
- Most installment loans are for larger amounts and paid back over a longer period of time, making the payments more affordable.
How Can You Apply For An Installment Loan?
Many installment lenders including Jora have an online application process making it easier and more convenient for you to apply. In fact, with Jora, the process can be fast and simple.
At minimum, you will need the following to qualify:
- You reside in a state we currently serve
- You are at least 18 years old (19 if residing in AL)
- You have a job or other proven source of income
- You have a valid email address
- You have an active and valid checking account
For more information on our loan amounts, terms and interest rate, visit our What it Costs page or you could apply for an installment loan.