An installment loan is technically any loan that is repaid in several installments rather than in a lump sum. The reasons that people take out installment loans are twofold: first, they may not have adequate cash on hand to buy the asset; second, they may have investments that are more profitable than the interest rate on the loan. If one will receive, for example, a 10 percent return on an investment and can obtain a...
An installment loan is technically any loan that is repaid in several installments rather than in a lump sum. The reasons that people take out installment loans are twofold: first, they may not have adequate cash on hand to buy the asset; second, they may have investments that are more profitable than the interest rate on the loan. If one will receive, for example, a 10 percent return on an investment and can obtain a loan with a 5 percent interest rate, taking out a loan and placing cash in the investment is a financially prudent move.
Perhaps the most common type of installment loan is a home mortgage. There are several reasons why people take out mortgages to buy homes. First, they may not wish to wait to buy a home until they have saved up the full purchase price. Second, it often makes financial sense to buy rather than rent, since mortgage payments build equity and provide tax deductions, while money spent on renting does not do so. Lifestyle factors are also important, as one has far greater control over a space one owns than over a rented space.
Another common type of installment loan is a car loan. For most people, the choice between buying a car with a loan and leasing a car is one which depends on price over the period of ownership. Especially if one intends to keep a car for 5-10 years, buying a car with a loan may be less expensive than leasing.
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