Installment Loan

With an instalment loan, you receive the full amount up front and then repay it in equal, regular instalments, usually monthly. Each payment covers interest and part of the principal. Mortgages, car loans, student loans and most personal loans work this way.

For example, borrowing 25,000 at 6% over five years means 60 monthly payments of about 483. After the last payment, the loan is fully repaid.

Instalment loans differ from revolving credit, such as credit cards. With revolving credit, you can borrow, repay and borrow again up to a limit, and payments vary. With an instalment loan, the amount, term and payment are set from the start, and repaid money cannot be borrowed again without a new loan.

The fixed structure makes instalment loans predictable and easier to budget for. Making payments on time also builds a positive credit history. The main things to compare between offers are the interest rate or APR, the term, any fees and whether early repayment is allowed without penalty.