Business Funding

Understanding Installment Loans for Your Small Business

Read Time: 5 min

If you’re looking for a way to borrow money for your business without suffering through high interest and credit card rates, installment loans could be a potential solution. Before you can apply for an installment loan online, you must know how it works. It’s important to understand what an installment loan is, how it’s calculated, and how it differs from other products on the market. Read on to learn everything you need to know about this type of business funding and

What Is an Installment Loan?

how to calculate installment loans

When it comes to defining what is an installment loan, simply put, it is a type of cash loan, where you borrow a specified amount of money at one time, and repay it in equal, fixed amounts, over a set period of time.

You may already be familiar with this type of loan as the vast majority of auto loans and home mortgages are exactly this.

It is important to note that, unlike revolving credit lines, you must decide on the amount of money you would like to borrow beforehand. If a borrower wishes to borrow more in the future, they would have to apply for a new loan.

How do installment loans work?

If you want to know how installment loans work, the process is simpler than you may think. This type of loan has a lot to offer, including:

  • Flexible Repayment terms: The borrower can choose how long (months or years) the length of term will be. Payments are typically monthly. Each payment is an installment, as it’s a fixed amount.
  • Secured and Unsecured options: Some installment loans require you to secure it with some type of collateral, while others do not.
  • Speed: Once you get an approval for an installment loan, you can typically receive funds the next day.
  • Convenience: You can complete the application process at a lender’s physical location, or with one of the many lenders that offer these types of loans online. 

When to Consider an Installment Loan

Business is often full of little surprises. Some of these may come in the form of unexpected equipment expenses, repairs, or other business expenses. For specific events such as these, you may decide that instead of depleting savings or when enough cash is not available, paying the amount back in fixed, monthly amounts is a more financially feasible way of doing things and allows you to budget accordingly.

Knowing when to consider an installment loan versus another product is very important. For instance, it is wise to research how much your interest would be for a business line of credit, compared to rates for an installment loan to see which would offer you more favorable terms. In addition, unlike payday loans which you must repay by the next paycheck, installment loans offer the borrower to take months if not years to pay off based on the loan terms.

Use cases

Installment loans are nothing new. They are one of the most common types of loans on the market. In times of need, this can be a very useful way to obtain funds rather quickly. From 2019-2020, total overall consumer debt has grown by 6% as the pandemic caused many to seek ways to help them through financial challenges.

Some of the ways in which small businesses use installment loans are:

  • Commercial real estate mortgages
  • Company vehicles
  • Seasonal inventory
  • Startup funding

Types of Installment Loans

There are many installment loans that we use and hear about every day. Here are just a few of the most common examples:

  • Mortgages: With a mortgage, you borrow the value of the house and pay it back in fixed, monthly installments over the loan term (typically 15 – 30 years). You use the home itself as collateral to secure the property, so it’s important to not miss too many payments and pay back the loan.
  • Auto Loans: The borrower will borrow the purchase price of the vehicle plus interest and make fixed payments over the course of 2-6 years typically. In this case, the car secures the loan, as the car will be repossessed if the borrower misses enough payments.
  • Business Loans: These can be secured with collateral or not. Businesses can take these loans out for any type of event. They typically have repayment terms of 2-7 years, and the borrowed amount can vary between $1,000 up to $100,000.

How Installment Loans are Calculated

how do installment loans work

You may be wondering how installment loans are calculated. There are three main factors that come into play when trying to find out how much your monthly payment will be the:

  • Amount of money you would like to borrow (principal)
  • Interest rate
  • Loan term

Monthly Payment = P (r(1+r)^n) / ((1+r)^n-1)

  • r: Interest rate
  • n: The number of payments in total
  • p: Principal

If math is not your forte, feel free to go to a website that offers installment loans online and use their loan calculator.

How can I receive my funds?

After a lender reviews and approves your application, they will provide the money in one lump sum. As a borrower, you must then repay the loan until the term ends.

Installment Loans and Your Credit

Due to the nature of installment loans being paid in fixed monthly payments, as long as the borrower is making those payments on time and not missing any, this is a great way to build credit. Financial institutions appreciate a clean payment history and will boost credit scores as a result.

Can I still get an installment loan if I have bad credit?

If you have less than stellar credit or your business credit score is under 630, you may still be able to qualify for this type of loan. The lender will need to review additional information. This may include your employment history, education, bank account transactions, and examine any debts you have overall.

Now that you know what online installment loans are and how they are calculated, taking the next step isn’t far away. Make sure to research reputable lenders who have experience in the industry and offer you reasonable interest rates. Start your journey today.