Installment Interest (Loan Interest)

What is an installment loan? Unlike a revolving loan where money is continually available whenever you pay off a portion of the balance, an installment loan is a loan that is paid off over time with a set number of payments, over a term. This means that every month (or whenever your payments are due), you pay the same amount and at the end of your term your balance should be zero. This makes it easier to budget because you know exactly how much money you are required to pay each month. These payments include both principal and loan interest. Once the loan has been paid off, it is no longer available. A car loan, RRSP loan or mortgage financing are three examples of installment loans.

The other main difference is that, unlike revolving loans which can be used to purchase anything, installment loans are generally used to make one big purchase, like a car or home improvements.

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Installment loans are often a better choice for those who need to borrow because the interest is pre-determined, the date at which the credit will be paid off is pre-determined and payments are fixed. Because balances don’t revolve, as long as you make your payments on-time, installment loans can have a very positive impact on your credit rating. With an installment loan, you do not have the option to use what you have paid off. Once the money has been paid off, you no longer have access to that portion of the credit and therefore can’t rack up any further debt.