Definition of Installment Debt

Equal size payments are a characteristic of installment debt.

Consumer debt falls into two categories, installment debt and revolving debt. Installment debt always has a fixed term; revolving debt does not. Installment debt has several variations, all of which still have a set period of payment.

Time Frame

Installment debt always has a fixed period; you know in advance when the last payment is due. Auto loans and mortgages are generally installment loans.

Types

Most installment debt has fixed interest rates, resulting in equal payments. Some have variable rates, causing payment amounts to fluctuate during the repayment period.

Total Interest

Calculate the total interest you will pay on an installment debt by multiplying the payment amount times the number of payments, then subtracting the amount borrowed. This difference is the total interest you will pay.

Benefits

Set payments for a fixed time period make budgeting and other financial planning easier. Fixed interest rates, common on installment debt, reduce risk of payments increasing due to changes in interest rates.

Expert Insight

Replacing revolving debt with installment debt can help to eliminate debt faster and prevent interest rate changes from increasing your payments.

References

• DebtHelp.com: Your Guide to Revolving Credit and Installment Credit
• ImprovingYourWorld.com: Installment versus revolving debt