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How installment loans influence your credit score

How installment loans influence your credit score
How installment loans influence your credit score

Have you thought about the influence of installment debt to your credit score? It seems like many people are wondering what that is. Like in many things in life, especially with financial matters, the answer to that question depends on many different things as there are many factors to consider and each situation is unique.

Taking out an installment loan may really hurt or help your credit score. That depends on things like how you are utilizing the loan. Installment loans, like most forms of borrowing, can be quite beneficial to your overall financial stability, if managed right. They can improve your rating, put you in a better position when qualifying for other loans, make it easier to get better loan terms and rates and stabilize your finances.

What is an installment loan

Installment loans are loans in which the borrower has to repay in scheduled amounts (installments) over a fixed period of time. It can be five months, five years or longer. Installment loans include mortgage loans, car title loans, personal loans, student loans and many others.

How installment loans can help your credit score

How installment loans can help your credit score
How installment loans can help your credit score

Installment loans can help your credit score when, for example, you use the money to pay off more costly revolving debt or expand the diversity of your consumer report.

  • Account types diversity

By adding diversity to your borrowing history, taking out an installment loan can really improve your credit score. When a lending company is considering whether or not it should lend you the amount of money you desire, they look at your borrowing experience diversity much like you’d observe someone’s behavior at work or with his friends if he wants you to lend him a certain amount of money. The algorithms that lending company use operate in a very similar way. Taking out different types of installment loans could really expand your diversity.

  • Utilization Ratios

Taking out a new installment loan in order to consolidate an existing one can decrease the utilization ratio which may then temporarily help with your credit score. 30% of your rating is made up of your revolving credit ratio.

Installment loan borrowers are able to consolidate their installment debt into just one account and by doing so, they get a few benefits. That way the borrower has less accounts to manage every month, the interest rate of the loan lowers, and the utilization ratio on revolving debt improves which temporarily helps the borrower’s credit score.

As long the borrower doesn’t run up new balances on his existing revolving accounts, consolidating debts into one loan helps with the credit score. The utilization ratio of the installment loan is not really considered by credit scores. This variable does not predict future delinquencies but correlates with the age of the account.

How installment debt can hurt your credit score

installment debt can hurt your credit score
installment debt can hurt your credit score

Installment loans can often be swords with two edges. Borrowers realize that installment debt can actually lower their credit scores when, for instance, they open too many accounts too fast. In most cases, paying off a loan early is considered good. However, many borrowers don’t financially buffer themselves when they do that which often leads to other problems.

  • Too many loans

If you take out  many installment loans within a short period of time, it can really hurt your credit score, as well as your ability to qualify for a mortgage. As we all know, too many in any endeavor does not lead to anything good and the example here makes no exception.

The amount of new installment loans makes up another 10% of your rating.

When the algorithms see too much new loan activity, they usually tend to subtract points as that is a warning sign that a borrower may get into trouble.

The odds of delinquency also increase when you’ve taken out too many installment loans. Doing so also spikes your debt-to-income ratio and increases the total amount of debt. Your chances of falling behind on your loan account increase with every installment loan you take out.

  • Paying Off loans Early

Paying Off loans Early
Paying Off loans Early

When you pay off your installment loan earlier than scheduled, it does boost your credit score a little. But in case you haven’t calculated your budget right, it can cause you real problems. Paying off early doesn’t really get you any bonus points. The consumer report will simply say that the loan amount is repaid according to terms and that’s all.

Let’s say you decide to pay the loan in full which leaves you with little cash or none at all. You think is all fine since you’ve calculated your budget. But what if the month after that, an emergency bill comes up, someone gets sick or your car breaks down and you don’t have any money to take care of the situation? You’re going to have to take out a new loan when you could have just stick to your previous when making your fixed monthly payments.

There is probably a solution for this problem and that is building an emergency fund that can cover emergency costs. Once you have your emergency fund, you can start to think how to pay off your installment loan earlier. That way, paying off the loan earlier will not hurt you. It will help you with your credit score instead.

 

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5 secrets about installment loans

5 secrets about installment loans
5 secrets about installment loans

Installment loans are thought to be a lot safer than payday loans. Is this really true or are they just as risky for the borrowers?

installment loans can be renewed into new loans
installment loans can be renewed into new loans

Payday loans are probably the most popular type of short-term loans out there. Even though there are many different opinions about them, there is always one certain thing – high risk. This fact by itself leads to the growth of another type of loan – installment loans that have the reputation of being a much safer choice. However, lately, different researches showed that this may not be the case or at least not fully the case. It turns out that there are some secrets in installment loans that may pretty much change the way that borrowers look at them. Some lending companies claim that installment loans are better than payday loans due to the fact that they don’t include the final payment that can really make the borrower go over the edge, making him end up with even more debt. But that alone does not necessarily make them a safe service. According to Lauren Saunders who is a an attorney, working at the National Consumer Law Center, “There are installment loans that have very deceitful add-on fees, extravagant rates, and deceptive products, and tricks such as loan flipping, that make them just as, if not even more dangerous than payday loans.”

Installment loans, much like payday loans, don’t start off looking like they involve a big amount of money. A lot of people who are financially vulnerable are easily attracted by what these short-term loans have to offer. Since information is essential when making any financial decision, we’ll uncover 5 secrets about installment loans to help you make better choices.

They are not a one-time solution

Installment loans have the reputation of being an easy, one-time fix to a financial difficulty. Reality is, much like payday loans, installment loans can be renewed into new loans over and over again. And lending companies providing installment loans tend to make their clients do that. A research showed that about 76% of the company’s loan volume consists of renewals of existing loans.

The annual percentage rate can go as high as 500%

annual percentage rate can go high
annual percentage rate can go high

A customer participating in an installment loans customer research had an APR of 110% listed on his contract. Even though this sounds bad, there are much worse cases out there. By renewing their loans over and over again, borrowers can end up paying incredibly big amounts in interest rate. The repayments are structured in a way that in the early stages you pay more in interest. Meaning that refinancers keep on paying interest but without putting much of a dent in the principal which doesn’t really help with getting out of debt.

Add-on fees

Recently, federal regulators have broken down on some credit card companies which sell add-on products such as ‘credit protection’ plans. That being said, installment loans lending companies are still aggressively trying to sell these services to their clients.

Installment loans are growing

As an indirect result of the negative focus that the media puts on payday loans lending, more and more borrowers are turning to installment loans in times of financial difficulties.

Installment loans lenders use aggressive techniques to collect their money

Some lending companies are really aggressive
Some lending companies are really aggressive

Some lending companies are really aggressive when it comes to collecting their money. In some cases, they may even start calling you before your due date. If the repeated calls don’t do the trick, they may start calling you at your workplace or even start harassing your friends and family. If you refuse to answer these phone calls, installment loans collectors may show up at your home or your workplace to continue their threats.

Conclusion

All types of loans have their benefits and downsides. It is up to you to decide which option suits you the most, but one thing is for sure – the more information you have, the better you are able  to make the right financial decisions.