Installment loans may serve as lending options that can improve your credit rating if you have a history of on-time regular payments.
The lender should report your payments to the credit reporting bureau so that your history improves. Besides, it may give you a better credit mix in case you’ve only used credit cards so far.
You need to take into account that you won’t see a sudden increase in your score, it may even lower a bit in the short term.
If you keep being responsible with your steady payments you will notice a sustainable boost in your rating. Here is what you should consider.
The Basics of Installment Loans
Installment loans are different from credit cards. Many consumers are familiar with credit cards and often have several of them for various needs and purchases.
Whereas this is a common type of revolving credit, an installment loan works differently.
A borrower requests a particular sum of cash for a certain financial purpose. This monetary assistance is issued by the lender in a lump sum and should be paid off in equal partial payments over the lifetime of the loan.
These payments can be weekly, biweekly or monthly and should be consistent to avoid penalties.
Installment loans may be secured (that demand some type of guarantee or collateral) and unsecured (that demands no guarantee).
If you’ve ever taken a personal loan, a student loan, an auto loan, or a mortgage, you should know that these are the widespread types of installment loans.
You may obtain the best small loans online if you don’t want to deal with the tedious hassle and paperwork of conventional crediting institutions. The sum that can be taken out depends on the service provider.
We recommend that you carefully read the terms of the loan so as not to get into an unpleasant situation.
Borrowers may request different sums for several months and even years. Credit cards may also be used for several years but they present a credit line with a particular credit limit.
How Installment Loan May Boost Your Credit Rating
You may obtain an installment loan and help your credit score provided that you:
- Pay on time. Borrowers who make consistent payments according to their loan conditions may boost their rating. The crediting company will report your payments to one or three credit agencies. These agencies will create your credit report including information about your payment history. This category plays an important role in establishing your credit score. If you make late payments or miss them for over 30 days, your rating may be damaged and lower.
- Credit utilization reduces. In case you get an installment loan to repay your credit cards, your rating may improve. Your credit utilization ratio will lower when you move your debt from credit cards onto installment loans. It will be beneficial for your rating as well.
- Own just credit cards. The account mix is also necessary for your good credit rating. Those who just have several credit cards without any other types of credit may want to request an installment loan to diversify their credit mix and improve their rating.
Do You Need an Installment Loan Only to Boost Credit?
Any lending option requires responsibility and dedication. One thing is when you need a helping hand with your finances to make a big-picture purchase, fund your tuition, or buy a home.
Another thing is when you just want to take out a loan for the sake of building credit. This isn’t the best decision.
You may opt for credit-builder loans which are meant for this purpose and are suitable for recent graduates with no credit or those building it from scratch.
The figure on the distribution of loan use, volume, and fees demonstrate the distribution of loan usage across borrowers. Almost half (48%) of consumers had over 10 transactions over the same period.
Fourteen percent of borrowers had over 20 transactions. On the contrary, twenty percent of borrowers had 3-6 transactions and thirteen percent of consumers had just one or two transactions over the 12 months.
If you decide to request a credit-builder loan, you will get the funds deposited in your checking account but they won’t be released until the whole sum is repaid.
If you pay this debt according to the repayment schedule, your credit history will improve. Failing to make consistent payments will hurt your rating.
Extra Ways to Improve Your Rating
While payment history is the most essential defining factor in your rating, your credit utilization is the second.
The lower your balances on revolving types of credit are, the less risk you present as a borrower to the crediting companies. You should aim to repay your current credit card balance on time each month.
It may be difficult to cope with multiple credit cards but you need to try your best. Don’t utilize over 30% of your credit limit to keep your credit utilization low.
Those with less debt on their cards tend to have higher credit scores.
Another great alternative offered by Experian is to boost your present rating by giving the credit agency access to the payment history for your bills that wouldn’t be traditionally considered in your reports, such as your utility or phone bills that you cover using your bank account.
The option called Experian Boost offers such a possibility to consumers to make regular payments and want to add them to their credit reports.
This free tool will quickly boost the FICO rating of the borrower based on their credit file.
According to the information from USA.gov and the Truth in Lending Act, lending companies need to provide borrowers with the following data so that they can compare different offers.
Before you agree to sign the contract to purchase an auto or a house, make certain you fully understand all of the creditor’s conditions, including:
- The payment sums and when they are due.
- The dollar sum you are taking out.
- The overall finance charge, including all fees and interest.
- Penalties for missed or late payments.
- The APR to repay over the term of the loan.
- Penalties in case you repay the loan earlier.
- What the creditor does if the borrower can’t repay the loan?
The Bottom Line
All in all, getting an installment loan may be a suitable option for building your credit provided that you understand the loan terms and conditions.
Any crediting tool you request is your responsibility and should be repaid according to the schedule given by your lender.
Make on-time payments to lower your credit utilization ratio and boost your rating.
Also Read: How To Get A Debt Consolidation Loan