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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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How to choose an installment loan

How to choose an installment loan
How to choose an installment loan

Even though there a lot of people who probably don’t even know the definition of an installment loan, there’s a pretty good chance they would need to take out one some day.

What is an installment loan?

What is an installment loan?
What is an installment loan?

An installment loan is a type of loan in which you pay back the amount you’ve taken out in a set number of scheduled payments over a certain period of time. A lot of different types of loans fall into the category of installment loans, that includes mortgages and auto loans. Even though credit card requires a monthly minimum payment, it is not an installment loan.

As we already said, installment loans require a number of regular payments over a certain period of time. Compared to payday loans, installment loans normally last longer (they could last several years) with each payment evenly spread over the whole period of the loan with interest included.

No doubt, taking out an installment loan can be quite beneficial, especially if it is for big purchases and also for any other situations where you are in need of cash. Installment loan lending companies not only provide borrowers with much lower interest rates on their loans compared to other types of loans, their clients also build credit if their credit history is poor or if they don’t have a credit history at all.

If you are considering an installment loan, the first thing you should probably do is get information about every type of installment loans to find the one that is best suited for your situation. After that, you should find a reliable installment loan lending company to work with. We are going to share some insights on how to choose an installment loan that works for you.

Different types of installment loans

Before you decide to take out an installment loan you must know the different types you can choose from:

  • Unsecured Installment Loans

Student Loans
Student Loans

Normally, unsecured installment loans are loans for a small sum with high interest rates. They are some of the most popular types of loans you can find. With unsecured installment loans, you get your money from the lender and you have to pay it back over an agreed period of time. Going for this type of loan makes the most sense when you need money only for a short time period – 4-5 years or less. It is also worth mentioning that if your payments are on time, it can really help you with rebuilding your credit.

  • Student Loans

Student loans are a type of installment loan where you get a set amount of money for your educational expenses. Once you are out of college, you have to pay back the loan by paying a set amount of money each month. Student loans also give you the option to defer your payments for a period of time when you are unemployed but once you’re employed again, you will have to pick up the repayments again.

  • Mortgage Loans

When taking out a mortgage loan, what you are able to do is to finance your house and pay back the loan over a set number of years. It is of great importance that you do your repayments on time or you will be at risk of losing your home and badly damaging your credit.

  • Car Loans

Car Loans
Car Loans

If your car has broken down or you just want to buy a new one but you don’t have the cash, probably a car installment loan is the answer for you. Keep in mind though that much like mortgage loans, if you are not able to pay the money back on time, you risk your car being taken back.

Choosing the right lender

Once you’ve decided what type of installment loan you want to take out, it’s time to choose a reliable lender who is best able to meet your needs and apply for your loan. To do so, here are a few steps you could take:

  • Make a good financial portfolio

Make a good financial portfolio
Make a good financial portfolio

The application process itself does not create as much stress as the documents you have to prepare in order to ensure your application for the installment loan will be approved. What you need to do first is to collect all the data (your credit records and financial status). Perhaps your liabilities and assets are what your potential lending company may be interested in, so you must not forget to take them along with you.

Even though traditional banks are way more strict when it comes to your documents, installment loan lenders also require some paperwork, so you should keep that in mind.

  • Think the whole thing through

You shouldn’t apply for an installment loan if you are not completely sure that you need one. If you decide to apply for one, you should ask yourself whether you can afford to repay it. Your ability to pay back the installment loan should be your main concern.

  • Few things you may want to do before you proceed with your loan:

  • Ask which are the types of installment loans you qualify for
  • See if there are any hidden fees or charges you’ll have to pay apart from the interest rate

Doing those things will help you find an honest and reliable lender.

Apply for your loan

Once you’ve decided which type of loan you want and you have found the right lender, there’s only one thing left to do – submit your application and get the cash you need.