Instalment debt is a specific amount of money borrowed for a specific purpose and repaid over a set period of time. Personal loans, car loans and leases, and mortgages are examples of instalment debt.

Loans

Term loans are repaid in regular payments over a set period of time. Most personal loans and car loans are term loans.

• Payments are applied to both interest and principal.
• The total amount of interest you will pay is determined at the time the money is borrowed.
• Interest may be a fixed rate for the entire term or a variable rate.
• The payments are the same amount, but over time the ratio of principal to interest that is being paid shifts. The amount that is being paid to interest gradually decreases as the principal is reduced.
• You can often choose the payment frequency – monthly, bi-weekly, weekly, etc.
• Most terms loans can be paid in full at any time.
• The financial institution may charge processing fees, application fees or other set-up costs.

Leasing

When you lease a vehicle, the dealership estimates what the value of the vehicle will be at the end of the lease term, known as the residual or buyout amount. The residual amount is subtracted from the purchase price of the vehicle, and you finance the remaining amount.

• You don’t finance the full amount of the vehicle, but you don’t own the vehicle at the end of the lease period.
• The interest portion of the lease payment is based on the total purchase amount of the vehicle, not just the lease amount.
• At the end of your lease you may walk away from the vehicle or arrange to purchase it by paying the residual amount.
• Monthly payments for leases are generally lower than those for loans on the same vehicle.
• You will be responsible for mileage and excessive wear and tear.
• It’s often expensive to break a lease before the term is up.

Mortgages

Mortgages are loans generally used to purchase real property and the loan is secured by a lien on the property. Mortgages can also be placed on a property you already own as security for a loan for another purpose.

• Mortgages require a down payment of at least 5% of the purchase price of the home.
• The principal is amount of money being financed—the amount of the mortgage.
• Mortgages are amortized over many years, generally between 10 and 30 years. Shorter amortization periods save you money because you pay less interest over the life of the mortgage.
• While amortization is the length of the loan, the term is the time period where interest rates and payment amounts are set. There are usually several terms within the amortization period. Terms are usually between six months and five years, although some longer terms are available.
• At the end of the term you may pay out the mortgage or renew the mortgage for another term at the new interest rates.
• You can choose the payment frequency – monthly, bi-weekly, weekly, etc. More frequent payments help pay the principal down faster.
• Open mortgages allow you to pay some or the entire principal at any time without penalty. In exchange for this flexibility, the interest rates tend to be a little higher than closed mortgages.
• Closed mortgages have restrictions on the amount of principal you can pay in addition to you regular payments. The interest rates tend to be a little lower than open mortgages.