There are many different types of debts: auto loans, payday advances, credit cards, student accounts, refinancing, and mortgages. However, you can categorize them into two groups, which are revolving line of credit and installment accounts.
With an installment loan, you borrow a certain amount from a lending company, and you pay it back in specified monthly installments, with additional interest. You can use an installment loan to pay for a home, car, or even a college education for yourself, a spouse or children.
Taking out this type can improve your record with the major credit bureaus. Keep in mind, though, that improvements to your scores would not be instantaneous, but they can be helpful in the end.
What is an Installment Loan?
As mentioned before, you agree to repay a specific amount every month when you get an installment account. To qualify for one, the lending company would look at your credit rating and income in order to determine if you can afford to repay back the amount you borrowed over the course of the contract period.
The creditor will also ask several questions including your current employer and number of years you have been with the company. They want to establish if you will be able to manage to pay back the debt in the pre-determined monthly installments.
How Installment Loans Work to Your Advantage:
Major bureaus record all your debt transactions, including all repayments and borrowing. All your debts are part of your financial history. Paying off your debts can help broaden your history, but it’s important to make sure that you make monthly payments on time. By making timely payments, you show you can manage your debt in a responsible manner. Doing it on a consistent basis will help improve your credit rating.
Obtaining different types of debts also is another way to improve your credit mix. Major bureaus use algorithms that provide a high score for individuals with a variety of debt types. Having a good mix of installment and revolving debts could give you a higher rating.
In case you didn’t know, revolving accounts are debts that allow you to borrow against an imposed limit. You can make payments of different amounts every month. Some examples of these types of accounts are home-equity accounts and credit cards.
If you have primarily revolving accounts in your report from the major bureaus, you should consider getting an installment account to give variety to your portfolio. That’s one way you can improve your rating.
Cases in Which Installment Loans Can Help Your Credit Quickly:
There are instances in which getting a nation 21 direct installment loan can boost your rating in a short amount of time. For example, getting one can benefit you if you have a high level of plastic debt. You can use the loan to pay off your balances; that will improve your score within several months.
It is important that you keep your card utilization rate to around 30 percent, though. When the ratio is higher, your score will suffer. High usage rate often happens when you max out your credit cards.
You can also use an installment account as a debt consolidation tool to pay off balances that have high interest rates. Not only does it reduce your utilization rate, but it also allows you to keep up with your monthly payments.
Just make sure that you avoid using your plastic excessively so that you can maintain your usage rate below 30 percent. Aside from the short-term improvement to your score, consolidation would also help improve your standing with the reporting bureaus.
You can use this account to improve your rating from the major bureaus, and at the same time, pay off existing debts. Doing so would not work if you already have a good credit rating or a healthy history. Make sure you weight the advantages and disadvantages first before applying for an installment loan.
Short-Term Credit Rating Reduction:
Keep in mind that the lending company will make a detailed inquiry with any of the major reports bureaus. That may cause your rating to drop temporarily. Once they approve the application, you would see a small reduction in your score.
The normal dip in the score reflects the risk of defaulting on other accounts when a borrower tries to get a new one. Just as long as you pay all your bills on time, your rating will recover in a couple of months.
The temporary drop of your rating should not stop you from applying for an installment account. However, applying might affect your finances if you are going to seek more than one financial assistance within the year.
If you were thinking of applying for a mortgage or financing a new car, it would be smart to space the applications out so they are at least six months apart. That way, your credit rating has time to recover from one debt before you apply for another.
How to Get an Installment Loan:
The best place to start your search for this kind of loan is through a local credit union or bank, one where you already have an established working relationship. If you get an approval from the local bank where you already have a savings or checking account, they might offer discounts on the interest rate.
You can also find lenders online who provide personal financial solutions. Just make sure you do your research before applying for one. You should compare what companies have to offer first before coming to a final decision. Make sure that you are getting the best value from the deal.
Whether you are taking out a loan from a local bank or an online creditor, you should read the fine print of the contract. It shows the fees you need to pay, aside from the interest rate and balance. The contract also states what will happen if you default, as well as the charges if you want to pay the loan off earlier than the date stated in the contract.
As you can see, an installment loan is a useful financial tool to finance an education, home, vehicle, or the consolidation of other debts. It can improve your financial portfolio as long as you manage it responsibly by paying on time.