There are all types of loans out there and knowing which one to use and when can help you make much smarter financial decisions. Installment loans are just one kind of personal loan. So, let’s start by looking at what they are, exactly. We will look at how they work, how they differ from other personal loans, and when and why you might want to use them.
Wherever you hear about loans and borrowing, you are also going to hear about your “credit score”. In particular, you’re going to hear about how “bad credit” can exclude you from certain loans and deals, while “good credit” can help you get a better interest rate and more flexible payment arrangements. In particular, credit can greatly influence personal loans, such as installment loans.
But what exactly is a good credit score, what does it mean and how do you build it? Just as importantly, what are the kinds of loans that a good credit score can help you gain access to? Here, we are also going to breakdown what credit really means, how you affect it, and what kind of loans good credit can lead to. In particular, we’re going to look at how credit relates to installment loans and what, exactly, they are.
Installment loans are the most commonly used kind of loan. Like other personal loans, you agree to borrow a set dollar amount from a lender. The lender gives you a series of monthly payments, a full schedule from beginning to end, to pay back, with interest added on top of the loan.
These loans come in all kinds of flavors, with specific installment loans for cars, homes, starting a business, and so on. When talking about “installment loans” in general, however, most are referring to personal loans that can be used for any purpose.
Installment loans terms and interest rates can differ greatly depending on your lender and some other factors, such as your credit score. When applying for any installment loan, ensure that you take a good look at both the interest rate and the APR. The APR, also known as the Annual Percentage Rate, includes not just interest but any other fees or charges that come with the loan.
For instance, if you use a $100 loan with a 1% interest rate over a period of one month, you will pay back $101 with the interest added on top. This might not include everything in the APR, however, so you need to know the APR, not just the interest, to understand exactly what you’re going to be paying back.
Let’s say that you and a lender agree to a loan of $20,000 over a five-year period. The loan has an 8% interest rate and a 2% administration fee, making a 10% APR. For sixty months, you would be paying $400 if there was no APR. With interest and fees added, however, it takes it up to $440 a month.
Installment loans are some of the most reliable loan agreements you can hope to find. The best installment loans have low APRs, transparent fee policies, and some flexibility in repayment terms.
Payday loans can be considered a type of installment loan, but most would categorize them as something entirely different. Most installment loans tend to be long-term financial agreements regarding large amounts of money, often more than you would be able to pay back in a single year. They can take some time to approve and often require you to have a good credit score.
On the other hand, payday loans cover smaller amounts that you pay back in a shorter amount of time. Rather than paying them a piece at a time, you most often pay back the whole sum back at once, with all the interest and fees. In comparison, payday loans tend to have much higher interest rates than other installment loans.
Though their reliance on your “credit” can confuse some people, it’s important to note the difference between installment loans and credit cards, or other forms of revolving lines of credit. With an installment loan, you are paying back a fixed amount of money with a fixed repayment scheme. Revolving credit, on the other hand, gives you a borrowing limit. You can dip into this amount when you want, as much as you please, so long as you don’t go over that limit. With revolving credit, like credit cards comes a minimum monthly repayment. You can pay more than that minimum if you wish, but if you pay less or fail to pay, your card can start adding charges or even default.
All of your borrowing, whether an installment loan or revolving line of credit, are going to take your credit into account. When talking about credit, we are talking about two things in particular:
The factor that most companies will look at is your credit score, which is impacted by your credit history. By inspecting your credit history and noting erroneous reports, however, you can positively impact your credit score.
Bad credit is one of the most financially limiting attributes for a person to have. Not only can it relegate you to higher interest rates and shorter repayment times on installment loans. It can exclude you entirely from good loans, credit cards, and much more. But what is it that dictates whether your score is good or bad?
On the scale of 350-800, the majority of lenders agree that 630 and upwards are a decent credit score. From 629 and down, you are officially considered to have “bad credit”. The system is categorized in a little more detail:
If you have excellent credit, you will have access to the most competitive loans with the lowest interest rates and most flexible repayment schemes. Good credit means you can still qualify for most loans and credit cards. With average credit, however, your options start becoming more limited. You can still successfully apply for home loans, auto loans, and so on, but your interest rates will be higher. With bad credit, very few lenders will lend to you. You may need to use collateral or payday loans instead of the more financially reliable options.
There are a variety of reasons your credit score may not be as high as you like and a variety of ways to help improve it. In most cases, you will need to take the long-term strategy. Ensure you have paid any outstanding bills or repayments and continue to repay loans as per your agreements. In time, bad marks on your credit history will disappear and the good records will replace them.
In some cases, however, there are marks on your credit history that don’t belong there. Lenders, utilities, and other companies make mistakes by billing or recording bad marks to the wrong names all the time. Take a closer look at your credit history to ensure that you don’t have any black marks on your record that don’t belong to you. If you do, you can often talk to the creditor directly and have them correct the record.
You might have a low credit score but no black marks on your credit history at all. If that’s the case, then it’s most likely that you don’t have any credit history to speak of. Lenders want to ensure that you’re a reliable borrower and having no evidence of that to your name can exclude you from certain loans, credit cards, and purchases. Starter loans and small bank overdrafts can help you start building a credit history from scratch.
If you have truly bad credit but you need a loan from a borrower, there are options still there for you. One of the most common is using a form of collateral for the loan. Collateral is most often property or auto vehicles but might sometimes be a business or other asset that you own. When you place collateral on a loan, you are using the value of that asset as reassurance you will pay the loan back. If you fail to repay the loan, however, the asset you placed as collateral can be repossessed by the lender.
Installment loans allow borrowers to agree to fixed terms that allow them to create reliable repayment plans. However, how favorable the terms of these loans depend on your credit. Make sure you know your credit score and history, as well as the criteria for a successful application before you try to borrow. Even a rejected loan application will negatively impact your credit score.