Glossary of Business Credit Terms

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Installment Loan

What Is Installment Loan?

An installment loan is a type of loans that allows the borrower to pay a fixed amount of money to the lender from time to time. With this type of loan, the borrower pays the lender some part of the amount of money they borrowed at scheduled times that both parties agree on.

How does Installment Loan Work?

With installment loans, a borrower must have to agree to terms with the lender by following some formal processes like the signing of documents which would clearly state the terms and conditions both parties must abide by. During this process, the purpose of the loan must be specified by the borrower. For example, the borrower must specify that they are taking a loan to purchase asset and that they will pay by installment.

Apart from the amount of money agreed upon by the borrower and the lender to be paid during the course of the loan, the borrower will have to pay some certain kinds of fees such as loan origination fees, processing fees, potential extra charges, etc. A borrower can also pay off the loan before the stipulated time that was agreed. This is advantageous as the borrower may be able to save interest charges.

It must also be noted that some installment loan terms come with prepayment penalties where the borrower is mandated to pay some amount of money because they paid off the loan earlier or later than the time agreed between both parties.

How to Obtain Installment Loan?

You can get installment loan for your business from any bank, online lender or financial institution. If you have a good credit score and an asset that can be used as collateral you can get the credit. Or else, you can get additional security from a co-signer.

The Advantages and Disadvantages of Installment Loan

Installment loans come with several advantages which make them very popular with small businesses. The fixed interest rate makes the monthly payments fixed which is known to the borrowers before taking the loan and hence they can make arrangements to repay the loan on time. Installment loan is generally long-term and hence attracts low interest rates.

However, there are a few disadvantages of installment credit like in a volatile market, when market interest rate drops, the borrowers have to pay the higher fixed interest rates.
The conditions of the loan are fixed at the time of taking the loan and if the borrowers face any negative situation, they may face default also.

How Installment Loan Affects My Business Credit?

The way you repay your loans will have an impact on your business credit score. If you repay the loans on time, your business credit will not suffer and your credit score will be healthy.

Installment loan is considered less harmful to your credit score.

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