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Installment Note

DEFINITION

Obligation for a borrower to repay the lender by making periodic payments on a specified schedule. Payments in an installment note are equal payments throughout the duration of the note.

EXPLANATION

An installment note is a type of repayment mechanism that requires debt to be paid in installments until the debt is paid off. A mortgage is the most common example of an installment note because a mortgage gives borrowers the option to pay off the principal balance of their mortgage over through monthly mortgage payments. It is the opposite of a balloon payment that requires a borrower to pay the full principal balance at one time.

Common installment notes include 10-year, 15 year of 30 year fixed programs. In this scenario, payments would be paid on a weekly, monthly, quarterly, or annual payment arrangement. In an installment note, payments are typically the same until the loans balance is satisfied.

Understanding Installment Notes

Installment notes are in essence a type of liability that is usually guaranteed by collateral. They are produced through a promissory note to ensure evidence of the debt and the parties involved. Each payment in the installment note must be of equal amounts paid on a specified date, typically the same day of the month. While the payment amount will go down over the life of the loan because of the reduced principal loan balance, the interest rate is typically fixed and will not adjust. Therefore, payments generally fall over the course of the loan’s history.

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