Installment Loan Help: What Are Installment Payments and Do They Improve Your Credit Score?
Are you struggling with a poor credit rating? Are you looking for an effective way to improve your credit score? If so, it’s time to learn about installment loan payments.
According to the credit bureau Experian, nearly a third of Americans have a credit score lower than 601. This is the distinction between bad and fair credit. The same report shows that of the 220 million scoreable people in the U.S, 68 million of them have bad or poor scores (lower than 601).
A poor credit score affects many aspects of your financial life. For a start, it is difficult to access cheap credit with bad credit.
You also have to grapple with higher rates and more restrictive terms on approved loans. A 2016 CareerBuilder survey found that 29 percent of employers check credit reports. This means you might miss out on your dream job due to poor credit.
Other effects of poor credit include higher insurance premiums, problems renting an apartment, among other things.
Financial experts say installment payments are a good start in repairing a poor credit score. The question is; what are installment payments and how do they impact your credit score?
What Are Installment Payments? Here’s Everything You Need To Know
In March 2019 U.S. consumer debt rose 3.1% to $4.052 trillion. This means more people might end up defaulting, leading to poor credit rating. The same report shows average household credit card debt is about $5,000 with the median debt at more than $16,000.
If you are a household owner, you must appreciate the importance of improving your credit. This is the only way to access cheaper loans and other financial services. Installment loan helps meet your financial expenses but more importantly, build your credit score.
Many financial institutions now offer installment loans. This is where you borrow a specific amount and make regular repayments. Auto loans, student loans, mortgages, and personal loans fall under the category of installment loans.
For this type of loan, the main feature is the regular installment payment hence the term installment loan. These monthly repayments include interest and a portion of principal.
By repaying the installments on time, you can build your credit profile. Your lender will report this good behavior to credit bureaus. These bureaus, in turn, put this information in your future credit reports.
According to myFICO, Score Watch, credit payment history determines 35% of a FICO® Score. If you take an installment loan and pay the installments on time, you will improve your credit score.
When considering your credit history, credit bureaus consider credit cards, retail accounts, finance company accounts, and installment loans. According to FICO, installment loans take more precedence over revolving credit. This highlights the importance of taking this loan as part of your strategy to improve your credit score.
How Installment Loans Work
Whether you need a car, house, appliances, or you have any other expenses, there are various credit options. Lenders offer various loan facilities to make such purchases. Each loan package has different repayment options.
Using an installment loan for such purchases is the suavest financial moves you can make. This is an amortized loan which requires a standard amortization schedule.
The lender provides this schedule detailing payments throughout the loan’s duration. A reliable lender also has a loan resource center to help lenders make the right decisions.
When creating this schedule, the lender considers several factors. These include any down payment, total principal issued, the interest rate charged, and the number of total payments.
You will need an installment account for this type of loan where your monthly repayments reflect. With a specific account for your installments, it’s easier to follow up on repayments. This also makes it easier to track your finances.
Installment loans help many household owners and businesses make big purchases. They’re the best option when you want to buy a house, car, or business assets. The manageable, periodic installments will not strain your finances every month.
For instance, buying a house is the dream of every individual. However, making a single payment is not easy. Most lenders offer mortgage loans with a 15-year payment schedule or a 30-year payment schedule.
This loan can help you own that dream house.
Using Installment Loans to Improve Credit Score
Installment loans have helped many people finance big-ticket items such as homes, cars, and appliances. However, these loans have a bigger impact on your financial life.
Scheduled installment payments for your loan can help you improve your credit score in various ways.
Repayments on Time
Payment history is the greatest influence on credit scores. Most people with bad credit got into the situation due to delayed payments and defaulting on repayments.
If you’ve poor credit, an installment loan will help you out. Once you agree on the terms of a loan, a lender will help you open an account.
The loan agreement indicates that you have to make regular repayments to the account.
A record of on-time payments every month gradually improves your credit score. Your lender will report your repayment history to the three credit bureaus. This is the information they use to generate a credit report.
As you continue making regular repayments, your credit score improves. This makes it easier to access cheaper credit, lower insurance premiums, and other financial services.
Conversely, late payments will have a bad effect on your credit score. Delaying payments by 30 days and above will lead to a negative impact on your credit score.
Diversifying Your Debt
Credit mix determines 10% of a FICO® Score. When determining your credit score, credit bureaus will consider your credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans.
People with a diverse mix of properly managed debt receive better credit score. This is a sign of financial prudence. The idea is that you should not put all your eggs in one basket.
If you don’t diversify your debt, FICO views you as a risk which leads to a poor credit score. Taking an installment loan is a double-prong strategy to improve your finances.
You’ll not only sort your expenses but also diversify your credit mix. However, it is not advisable to take loans without a purpose.
If you’ve plans to make a big purchase, it is time to learn what an installment account is. This is the first step when applying for an installment loan.
Financial advisors recommend the lowest interest rate for any credit facility you want to buy. When looking for an installment loan, you’ve to compare different lenders to find the lowest interest rates.
It’s advisable to look for an installment loan with an equal or lower rate than your other debt. Some lenders will allow you to consolidate all your debt into a single installment loan.
The best installment loans also feature low-interest rates. The fixed repayment schedule makes it easier to repay the loan faster.
Compared to credit cards, these loans take shorter time to pay, which saves you money. When you pay off your debt faster, your credit score improves. More importantly, lower interest rates reduce the risk of loan default.
Credit Utilization Rate
Credit utilization rate is the ratio of your outstanding credit card balances to your credit card limits. It’s a measure of the credit you use over some time. High credit utilization on your cards leads to a lower FICO credit score.
The level of debt or credit utilization accounts for 30% of your FICO credit score. When using credit cards, your credit utilization ratio will inevitably shoot up.
With an installment loan, you can pay off credit debt and reduce utilization ratio. You can also move your debt gradually from credit cards. This reduces your per-card and overall utilization.
Type of Installment Loans
With this insight on installment payments, the next thing is to learn what type of installment loans you can buy.
Over the years, financial institutions have continued innovating to meet emerging customer demand. The rise of online financial lenders has also seen more flexible loan products and solutions.
If you want to leverage an installment loan to improve credit score, here are some examples of loan products on the market:
If you want to buy a personal or business car, using an auto loan is the best option. This is an installment loan with monthly fixed repayments over several months or years.
Most lenders offer tailored repayment schedules based on your income. Longer term auto loans come with lower monthly payments and higher interest rates.
This credit facility allows you to own a car, and with timely repayments, you also improve your credit score.
These are loans to pay for any financial expenses. They’re mostly unsecured loans pegged on your income. For any financial expenses like medical bills, school fees, or a holiday expense; a personal loan is the best option.
These installment loans have terms between 12 and 96 months and require monthly repayment. They’ve higher interest rates as they require no collateral or guarantors.
Student loans are among the most popular credit facilities in the U.S. A report by the Chamber of Commerce shows one in five adult Americans carry student loan debt.
The increasing demand for higher education makes it necessary for college students to take these loans. People in employment also access cheap student loans from private financial institutions.
Many people struggle with student debt. Student debt is a $1.5 Trillion Crisis, according to a Forbes analysis report.
Consolidating your student debt through an installment loan is one of the best financial decisions you can make. This helps you repay your student loans easily and at the same time, improve your credit score.
Regular repayments of your consolidated loan impact your credit score positively. This is because your lender sends your payment history to credit bureaus.
This is an installment loan to build credit and works for people with poor credit, little or no credit history. As long as you have a regular income, you can qualify for this credit facility.
Your lender holds the amount you borrow in an account. When you start making on-time payments, the lender sends a report to three major credit bureaus(Equifax, Experian, and TransUnion).
Lenders also call these installment loans Fresh Start or Starting Over Loans. Once you complete repaying the loan, you’ll collect all your loan proceeds.
It is a great way to save money and at the same time, build your credit.
Buying a house is at the core of the American dream. Most people start saving early to buy a house, but it is not easy. Mortgages are the best option for anyone who wants to own a house.
These house loans have a term of 15-to-30-year with monthly payments. If you’ve always dreamt of owning a house, you can buy a mortgage and improve your credit scores while at it.
If you are in a tight spot in the middle of the month, you can take a payday loan to offset your expenses. These loans help to deal with financial emergencies before the next paycheck.
You can get up to $5,000 or more and repay the loan in a few monthly installments. For smaller amounts, you can repay the amount in one installment.
If you’re in employment, these loans help you handle short-term financial difficulties comfortably. There are no credit history checks. You can get a loan with bad credit and processing time is short and stress-free.
If you had searched the term “what are installment payments” online without finding much information, you now have some resourceful information you can act on. This innovative financial product is a great step towards improving your credit score.
Whether you’ve bad credit, short credit history, or no credit history at all, an installment loan can help.
At Bonsai Finance, we have a wide variety of flexible installment loans for every individual. We offer low rates and fast processing.
Our team has created a large loan resource to help consumers improve their credit scores. Call us today for a free quote on any financial product you might need.
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