Your example is a good one and is an excellent way to build credit and yes an installment loan usually has collateral involved, but not always. A financial institution will usually work with you on building credit, especially when done as you describe.
There are two basic types of credit, revolving credit and installment credit. The best example of revolving credit is a credit card. Credit cards are meant to be used and then paid off when the statement comes at the end of the billing cycle, usually monthly. The reason it's called revolving is because you owe it, then pay it off, then you can do it again. I know a lot of people carry a balance on their credit cards for a long period of time, but they are still considered revolving because you can borrow more on them at any time until you reach your credit limit. Credit limits on credit cards are predetermined by the card company based on your credit history and income.
An installment loan is any type of loan that is paid over time that usually have collateral. Two great examples of installment type loans are a car loan or a home loan. In these types of loans, you will borrow the money and pay it back in "installments", usually monthly over a long period of time until it's paid off. A personal loan (even though there may not be collateral attached) can also be considered an installment type loan because you pay it back over a period of time usually longer than one year.