What characterizes an installment loan?

An installment loan is characterized by being repaid over time through a series of scheduled payments, which typically include both principal and interest. This structure allows borrowers to make manageable payments on a regular basis, such as monthly, rather than needing to pay back the entire amount at once. It provides predictability in budgeting for borrowers, as they know their payment amount for each period. This format is commonly used for personal loans, auto loans, and mortgages, enabling borrowers to spread the cost of large purchases over the lifespan of the loan.

In contrast, a loan that is repayable in one lump sum requires the borrower to pay back the entire principal and interest all at once when the loan comes due. Loans with varying repayment amounts could lead to unpredictability in repayment, while a loan that does not accrue interest would not typically be classified as a traditional loan since one of the main features of loans usually involves interest charges.