Installment loans: What are they and how do they work?

If you’re looking for an installment loan, there are plenty of options available in Canada for good and bad credit. Plus, you can get one as soon as today. Interest rates, loan amounts, loan terms, eligibility criteria and other factors vary with installment loans, so carefully compare providers to find the best loan option for you.

In this guide, we’ll explore how installment loans work, including pros and cons and how you can use funds.

What are installment loans?

Installment loans are unsecured personal loans offered by alternative lenders. Unlike personal loans from traditional lenders like banks and credit unions, installment loans have more lenient eligibility criteria. This means you may still be able to qualify for a loan even if you have bad credit.

Loan amounts and terms vary depending on the lender. You can typically borrow amounts ranging from $500 to $10,000, but some lenders let you borrow up to $25,000 or even $50,000. You can repay your loan over a term ranging from 3 - 60 months.

Must read: Best installment loans

How do installment loans work?

When you take out an installment loan, you borrow a lump sum of money that is deposited into your bank account. Because the loan is unsecured, you don’t need to provide any assets as collateral.

You then pay back the loan amount plus interest in installments, making regular payments on a monthly, bi-weekly or weekly basis. Interest rates are usually fixed, which means your payment amount will be the same each time. However, installment loans typically have lenient eligibility requirements and subsequently come with higher rates than traditional personal loans.

Some lenders will also charge administration and brokerage fees to set up your loan. If you miss a payment, NSF and late payment fees might apply.

Finally, you can repay your loan early if your budget allows. Many alternative lenders let you pay off your loan early without penalty, but be sure to check your contract first.

Where do I get an installment loan?

Installment loans are offered by alternative lenders across Canada. You can apply for a loan online, while many lenders will also allow you to verify your identity and income online as well. If you’re approved, funds will be sent to your bank account by direct deposit or e-Transfer.

However, some installment loan lenders also offer storefront locations where you can apply in person if you prefer.

Compare installment loans

What are installment loans used for?

You can use an installment loan for any legitimate purpose. There are typically no restrictions on how you can use your funds. You might want to take out an installment loan to pay for:

• Car repairs
• Home repairs
• Medical bills
• Other unexpected expenses

Installment loans often come with high interest rates and should only be used when you need an emergency loan. If you need money to pay for a non-essential purchase such as a vacation, consider opening a high interest savings account instead.

What to watch out for

There are a few drawbacks to be aware of before applying for an installment loan.

• High interest rates. The APR on an installment loan can be as high as 47%, making it an expensive way to borrow money. Use a personal loan payment calculator to figure out the total cost of repaying your loan.
• Fees. Some lenders charge hundreds of dollars in brokerage or admin fees to set up installment loans with terms of less than six months. Check the fine print for details of any late payment or NSF fees that apply if you miss a payment.
• Scams. While there are many legitimate alternative lenders in Canada, be wary of scammers. Keep an eye out for any warning signs of a personal loan scam, such as charging an upfront fee, promising guaranteed approval or using high-pressure sales tactics. Research the lender thoroughly to ensure it’s legitimate. Learn more about guaranteed approval loans.
• Unnecessary borrowing. Just because you qualify for a loan, it doesn’t necessarily mean you should get one. Make sure you only use an installment loan to cover essential expenses.

How to calculate the cost of installment loans

The total cost of your installment loan will depend on:

• How much you borrow
• The loan term
• The interest rate
• Loan fees

When comparing loans, check the annual percentage rate (APR), which includes the interest rate and the loan setup/origination fee, to get a better idea of how much each loan will cost. Note that fees like NSF charges and prepayment penalties are not included in the APR.

To give you an idea of how much installment loans cost, let’s look at two examples.

Example 1: $3,000 installment loan

Lena’s car has broken down, and she needs $3,000 to pay for the repairs. She doesn’t have any money set aside, so she applies for an installment loan from an online lender. She gets a loan with a 19% interest rate and a 12-month term. There are no loan setup fees. Lena opts for a monthly repayment schedule.

Altogether, it’ll cost a total of $3,317.64 to pay off the loan.

Loan amount	$3,000
Loan term	12 months
Interest rate	19%
Fees	$0
APR	19%
Monthly payment	$276.47
Total cost to repay	$3,317.64

Example 2: Short-term $900 installment loan

Jim’s dog eats a sock, suffers a gastrointestinal blockade and needs emergency surgery. Jim has $1,500 in savings to pay for the surgery, but he needs an extra $900 to cover the veterinary bill in full.

He takes out a short-term installment loan that must be repaid in five months. However, the lender also charges a $225 brokerage fee. Combined with the short repayment term, this means Jim’s installment loan has a very high APR of 147%.

Loan amount	$900
Loan term	5 months
Interest rate	19%
Fees	$225
APR	147.575%
Monthly payment	$188.64
Total cost to repay	$1,168.20

Related: Short-term loans in Canada

How to apply online

To apply for an account you’ll need to:

• Be a Canadian citizen or permanent resident
• Be the age of majority in your province or territory
• Have a valid Canadian bank account

Income and employment requirements also apply. Depending on the lender, you might need to meet a minimum credit score requirement.

Here’s how to apply for an installment loan online:

1. Enter your name, date of birth and Social Insurance Number (SIN).
2. Provide your phone number, email and residential address.
3. Enter details of your income and employment.
4. Specify how much you want to borrow.
5. Provide proof of ID.
6. Provide proof of income using online bank verification, which allows the lender to access electronic read-only copies of your bank statements.
7. Submit your application.

How to pay off your installment loan

Your loan agreement lays out your installment loan repayment schedule. Monthly payments are most common, but weekly and bi-weekly payments are also available. Manage your budget carefully to make sure you can regularly make on-time payments.

If you come into some extra money, paying off your installment loan early will save you money on interest. However, check your loan contract to find out whether the lender will charge a prepayment penalty.

If you’re ever experiencing financial difficulties, don’t just ignore your regular payments—this will have a negative impact on your credit score and your debt could be sent to collections. Contact the lender before you miss a payment to see if it’s possible to negotiate a new payment plan to help you get back on track.

Bottom line

Installment loans have lenient eligibility criteria and offer fast access to funds. But they also come with high interest rates and fees, so they should only ever be used in financial emergencies. Compare installment loans from a range of lenders to find the best value.

Frequently asked questions

• How many installment loans can you have?

  There's no limit to the number of installment loans you can have, so it's possible to repay multiple loans at once. But the more active debts you have, the higher your debt-to-income ratio will be and the less likely you are to get approved for a new loan.

  Banks typically want borrowers with a debt-to-income ratio of under 40%. Alternative lenders have less strict eligibility criteria, so some will accept borrowers with a debt-to-income ratio of up to 60%.

• Can I get a no credit check installment loan?

  Yes, some online lenders offer no credit check installment loans. Rather than focusing on your credit history, these lenders will consider your income and employment history to determine whether you can afford to repay a loan.

  However, some predatory lenders prey on unsuspecting borrowers with the promise of no credit check loans, so do your research first to make sure you're dealing with a legitimate lender. To find out more, check out our guide to no credit check loans.

• How long does it take to get an installment loan?

  It depends on the lender. Some lenders offering a completely online application and approval process provide same-day funding if you need an emergency loan. However, it may take a few business days to get funded with other lenders.

• How can you calculate interest on installment loans?

  Use an online loan calculator to work out how much you'll pay in installment loan interest. Once you enter your loan amount, term interest rate and fees, you can calculate your monthly payment, total interest and the full cost of repaying the loan.

• How can I verify my income when applying for an installment loan?

  Some lenders will check your income using instant bank verification. This allows them to view electronic copies of your bank statements without the need for you to upload any documents. Other lenders may ask you to upload copies of pay stubs, bank statements or tax returns.

• Can I get installment loans for bad credit in Canada?

  Yes. Installment loans tend to come with lenient eligibility criteria, and some lenders offer loans to people with bad credit. These lenders consider your income and employment history to determine whether you can afford a loan. But because lending you money involves a higher level of risk, expect higher interest rates and fees. Learn more about the best bad credit loans.

• Can I get an online installment loan in Canada?

  Yes. Many alternative lenders let you apply, verify your income and identity and get approved completely online. Once approved, the loan amount is sent to your bank account by Interac e-Transfer or direct deposit.

• Will an installment loan improve my credit score?

  Yes—provided the lender reports your on-time payments to the credit bureaus. However, late and missed payments will hurt your credit score.