Comparing installment loans and conventional mortgages is like comparing rectangles and squares. Just as all squares are rectangles, but all rectangles aren't squares, so also all conventional mortgages are installment loans, but not all installment loans are mortgages. There are all sorts of other installment loans. What makes conventional mortgages installment loans is that they consist of a set number of payments of principal and interest with a fixed ending date.
A conventional mortgage has a fixed life. Every month, you pay off the interest that is due on the loan and you pay off a bit of principal. After making your payment, you owe less, so you end up spending less on interest in the next month. This frees up more money to pay down your principal, and this process continues until you pay your loan off. With a fixed-rate conventional mortgage, your payment never changes, but the amount of money you spend on interest goes down and the amount you pay on principal goes up.
Other Types of Installment Loans
Mortgages aren't the only types of installment loans. Most car loans are installment loans, since they have a fixed ending date. Students loans and personal loans are, too. Sometimes the term also gets used to describe a loan that is related to a payday loan. These types of installment loans frequently don't require a credit check but carry very high interest rates.
Secured vs. Unsecured
One of the biggest differences between types of installment loans are whether they are secured or unsecured. Conventional mortgages and most car loans are secured, meaning if you don't pay your loan the lender can take the collateral. Unsecured loans, on the other hand, have no collateral. A personal loan or a student loan is an example of an unsecured loan.
A credit card is a good example of a loan that isn't an installment loan. When you borrow money on your credit card, your payment can vary and you can generally re-borrow money. For this reason, it's frequently called a revolving loan. Lines of credit, such as home equity loans, are also revolving loans. Some home equity lines of credit convert into installment loans when the period that you can use them to borrow money ends and you have to start paying back your balance.
- Oklahoma State University: Why Is a Square Also a Rectangle?
- Capital One: Understanding Loans and Lending
- The Mortgage Professor: Mortgage Amortization: How Does it Work?
- Time: Four Dirty Secrets of So-Called Installment Loans
- Nolo: What is an Unsecured Debt?
- Bankrate: Credit Wars: Revolving vs. Installment
- California Real Estate Finance: How Does a Home Equity Line of Credit (HELOC) Work?
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