Calendar with every other Thursday circled on the calendar to show an example of a repayment schedule for an installment loan (préstamo a plazos).

What is an installment loan and how does it work?

If you’ve ever had to shop for a loan, you know that the vocabulary can be confusing. In this post, we will do our best to explain how an installment loan works.

Let’s first consider a situation: It’s summer time, the temperatures are hitting triple digits, and the air conditioner in your car is broken. You work hard, but just don’t have the $1,000 needed to fix it right now.

Given this problem, personal installment loans could be a responsible option.

How does an installment loan work?

Installment describes how a loan is repaid. Installment loans are paid back over a set period with regularly scheduled payments, usually of an equal amount. The lender and borrower agree to the time period, frequency of payments and amount before making the loan.

Following the example above, if you borrowed $1,000 using an installment loan, you might have a set repayment period of 9 months and payments due every two weeks. Payments include principal and interest.

Set period:                   9 months to repay the loan

Payment schedule:      Every two weeks

Payment amount:         Pre-determined, typically equal payment amounts

Installment loan compared to payday

For comparison, a payday lender might only be able to give you $300 that you would need to repay in full, plus interest, in two weeks. You must repay it all at one time. You do not usually get to make partial payments, and if you can’t pay it all back on the due date, you might be rolled into another payday loan, and another one, until you’ve paid it all off. And since you need $1,000, you may even have to get multiple payday loans.

Installment loan compared to a credit card

Another comparison, $1,000 on a credit card means you only have to make a minimum payment, say $50, each month, which can vary from month to month according to how much you owe. Payments are not fixed and can increase. The higher your balance, the higher your minimum payment. You will also accrue interest on the unpaid balances each month, which can add up quickly if you are only paying the minimum payment.

Installment loans at Oportun 

Since 2007, Oportun has offered affordable and responsible installment loans. We believe that the installment loan structure and payment schedules makes each payment affordable in a borrower’s monthly budget. We also like the transparency that a borrower knows exactly how much they have to pay and when. These things lead to more customers successfully paying off their loans. 

We also don’t charge prepayment penalties for early payment, so if you have some extra income, you can pay off your loan early and avoid interest expenses.

Note, however, that if you are trying to establish credit history, it could take 6 months or more of payment history to do so and to get a credit score.

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