Description of Installment Debt

Installment debt is a common form of consumer credit, typically used for home mortgages, automobile loans, and credit card financing. It allows for debtors to repay the loan, plus interest and finance charges, in regular increments, usually monthly. In this way, she does not have to pay off the entire debt at one time. Creditors can take legal action if the debtor fails to make regular payments on the loan.

Definitions

Installment debt, as for credit-card purchases or mortgage payments, permits debtors to pay off the loan in increments, usually in monthly installments. These payments are applied both to the principal and to the interest the loan is accumulating. If the debtor begins to miss payments, the creditor can start taking legal action to recover the funds.

Uses

Installment debt is the preferred form of credit for large loans that borrowers could not hope to pay off all at once, such as home mortgages, which typically last for 15 or 20 years. Most auto loans, although smaller, are also considered installment debt since the loan must typically be paid off in monthly installments. Businesses also use installment debt to pay for large assets and project funding.

Advantages

Installment debt was created to make it easier for the debtor to manage the payments. Monthly payments that recur on a predictable basis are designed to complement a debtor's cash flow realities. This makes it easier for creditors to count on payment, distributing their profit over the life of the loan. This predictability is lessened when the loan has an adjustable rate, but it still remains a low-risk option for repayment.

Revolving Debt

Revolving debt is the most common alternative to installment debt. Revolving debt does not necessarily have a set loan amount, only a set limit that debtors can borrow against at any time. Lines of credit like credit cards are the most common form of revolving debt. Debtors can borrow freely within the limit, but after a certain period must make interest payments on the amount they borrow until they pay back the full amount. There is no set end date to the debt, although penalties may be issued if a borrowed amount is not paid back by a certain time, such as a year.