Simple and Steady
Installment loan payments are regular (monthly, for example) and fixed (they don’t increase or decrease). In contrast, credit card payments can vary: you only pay if you used the card, and your required payment depends on your balance.
With each payment, you reduce your loan balance and pay interest costs. These costs are baked into your payment calculation when the loan is made. To see how this happens in detail, learn how amortization works.
Installment loans are the easiest to understand because nothing changes after they’re set up. You’ll know how much to budget for each month. However, if you make extra payments (with a large lump sum, for example) you may be able to lower your payments with a recast.
Installment Loans and Credit
Using installment loans may help your credit. A healthy mix of different types of debt tends to lead to the highest credit scores, and installment loans should be part of that mix. These loans suggest that you’re a savvy borrower - if you fund everything with credit cards you’re probably paying too much.
Don’t go crazy with installment loans; use only what you need. A home loan, a student loan, and perhaps an auto loan are sufficient. Some installment loans can even hurt your credit. If you use finance companies (at rent-to-own establishments or retail stores, for example) your credit scores are likely to fall.