Installment and open-ended personal loans differ based on the terms of repayment. Understand the difference to find your best option.
When you open a loan or line of credit, you sign a legal agreement with your lender. Your loan agreement covers all the specifics of your loan: your loan amount, your interest rate, fees, the terms of repayment, and the consequences for failure to pay. We’ve already covered some of the possible consequences in our post about secured vs. unsecured loans.
Installment loans ask you to pay a fixed amount each period for the life of the loan. Installment loans always come with a shelf life. Long-term installment loans are things like 30-year mortgages or 5-year car loans. Installment lenders calculate your payments by adding the principal amount to the interest for the life of the loan. Then, they divide that sum by the number of payment periods over the life of your loan. If you make every payment on time, you will pay exactly what it says in the contract and complete your loan exactly on time. Think of an installment loan as a rigid, straight line from the day you take your loan to the day you pay it off.
Open-ended personal loans, on the other hand, are more flexible. Open-ended personal loan lenders calculate your payments fresh each period. Some open-ended products will let you add to your borrowed principal later. Flexible repayment means that these lenders are willing to work with you if you need to miss a payment, or if you need to change your billing schedule. If installment loans are a rigid, straight line, open-ended loans are as have as much give, stretch and wiggle as you need.