What Is an Installment Loan? | What Can You Use It For?

Installment loans can be a great financial tool. They make it possible to spread out a large expense over numerous months or years by making monthly payments that fit your budget. They can also help you build credit for the future.

Discover the many ways you can use an installment loan below.

What Is an Installment Loan?

Before looking at the types of installment loans, it’s a good idea to understand what installment loans are and what they aren’t. Simply put, an installment loan is debt that you pay back in installments, which are periodic payments that you agree to make.

It works like this:

  • You take on debt. For this example, consider a personal installment loan of $3,000.
  • The lender looks at a variety of factors (such as your credit history, income and amount borrowed) and then uses that information to set interest rates and terms for the loan.


An installment loan is in contrast to another common type of debt, which is revolving credit. With revolving credit, you have a certain credit limit. You can borrow against it and pay it back in a revolving fashion, sometimes owing more and sometimes owing less. Common examples of revolving credit include credit cards and home equity lines of credit.

What Can You Use an Installment Loan for?

Common examples of installment loans include student, auto, debt consolidation and personal loans. But those aren’t the only ways you can use an installment loan. Here are six ways you might use these types of loans:

1. Student Loans

All student loans are installment loans, whether you complete the FAFSA and get a government-backed loan or go with a private lender. The terms of these loans vary depending on what type of debt it is and factors such as your personal credit history.

Loans through the Department of Education, such as Direct Subsidized and Unsubsidized loans, have interest rates set by the federal government each year. For example, rates for federal student loans issued between July 1, 2020, and July 1, 2021, have rates between 2.75% and 5.30%, depending on the program and purpose of the loan.

Rates for private student loans depend on the credit score, income and existing debt of the borrower and/or cosigner. But in either case, when you begin to pay the student loans back, you’re expected to make a regular monthly payment; that is, you’re expected to pay the loan in installments.

2. Consolidating Debt

Debt consolidation loans are used to combine other debts — often those with higher interest rates — into a single loan. The purpose is usually to make debt easier to deal with while potentially reducing the long-term cost of the debt.

Often, people consolidate high-interest revolving debt (such as credit card debt) in this manner because it helps them pay it off sooner or in a way that is more feasible given their budget.

3. Refinancing an Auto Loan

Another way you might use an installment loan online to save money is by refinancing an existing auto loan. Perhaps you got the original loan at a time when your credit was less than stellar because you needed the car to get to work and didn’t have a lot of choices. You’ve since improved your credit and you can refinance at a lower interest rate to decrease the overall cost of the loan.

Or perhaps you simply don’t want to continue working with the current bank. There are many reasons someone might take out an installment loan to refinance an existing auto loan.

4. Covering a Medical Expense

If you’re facing a large medical or dental expense that isn’t fully covered by insurance, you might consider financing it. Some providers work with services or banks that offer installment loans for this purpose, and you can also find online installment loans. When you take out a personal loan online, you can usually use the funds for anything you want, including medical bills.

5. Paying for Other Unplanned Expenses

Medical expenses aren’t the only ones that can come up out of the blue. You might be facing a pricey car repair, a broken AC in the middle of summer or the need for a new appliance. An open installment loan can be a good way to cover such an expense — as you’ve seen above, this can be less expensive than high-interest credit card debt if you can’t pay off the purchase quickly.

6. Build Your Credit

In some cases, an installment loan can be used to build your credit. This is true for two reasons.

First, the biggest factor in your credit score is whether you make debt payments on time. If you don’t have a lot of experience with debt, there’s no history to base that determination on. Taking out a small personal installment loan and paying it back as agreed can help you establish that history.

Another factor in your credit score is what is called credit mix. Lenders like to see that you can handle multiple forms of debt in a responsible way, so having a couple of types of debt in your credit history is a good idea. The two major types are revolving credit, such as credit cards, and installment loans. If you only have credit cards on your report, you might want to take out a personal loan or auto loan to get an installment loan on your credit history.

Get the Best Loan for You

The right loan for you is one that meets your needs and that you can pay back as agreed, and obviously, you want to find an installment loan that offers you the best possible rates for your situation.

Here are some tips for finding the best installment loan for you:

  • Check your credit to find out where you stand. If you have poor credit, you may not have as many options for loans or might only have options at higher interest rates.
  • Decide how much money you need and why. You may need to let the lender know what you intend to do with the money, so it helps to know that going into the process.
  • Research loans to find options you think you can qualify for. Applying to numerous loans can cause multiple hard inquiries to hit your credit report, and that can bring down your score a bit.
  • Apply for one or two loans that seem right for you.

If you’re looking for an easy, no-hassle loan process, consider Wise Loan.

The recommendations contained in this article are designed for informational purposes only.  Essential Lending DBA Wise Loan does not guarantee the accuracy of the information provided in this article; is not responsible for any errors, omissions, or misrepresentations; and is not responsible for the consequences of any decisions or actions taken as a result of the information provided above.

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