An installment loan can help cover various expenses like a car repair, home improvement project, or medical bill. Once approved for a loan, you’ll get a lump sum of money and agree to pay off the loan with interest by making regular installment payments over time. Once you pay back an installment loan in full, the account will be closed. Let’s look at what installment loans are and how they can impact your credit history.
Types of installment loans
Not all installment loans are created equal. In fact, there are many different types of installment loans. While some loans are secured and backed by collateral which is an asset you own, like a house or a car, other loans are unsecured. All of them, however, have an interest rate, repayment term, and fees. Common types of installment loans include:
- Mortgages: A mortgage is designed to help you buy a home. In most cases, this type of loan features a longer repayment term of 15, 20, or 30 years.
- Auto loans: This type of installment loan is ideal for financing a new or used vehicle. Banks, credit unions, online lenders, and dealerships offer auto loans.
- Student loans: Student loans are used for tuition, room and board, books, and other education costs. You can choose between private student loans, federal student loans, or a combination of both.
- Personal loans: Personal loans are flexible products you can use to pay for virtually any expense. Individual lenders may have some limitations, which they’ll let you know about. Keep in mind that some lenders offer secured personal loans, but many more are unsecured.
Installment loans and credit scores
When you apply for an installment loan, the lender will look at your credit to determine whether to approve you. The higher your credit score, the greater your chances of approval. If you don’t have the best credit, you might still get approved, especially if you are eligible for a secured loan.
How you use an installment loan can impact your credit. If you make on-time payments, they may be able to improve it. If you make late payments, that’s likely to make it more difficult for you to qualify for financing in the future.
How to get an installment loan
If you’re interested in an installment loan, follow these steps.
- Decide on the loan purpose and type: Consider why you want an installment loan. Then, determine which type of loan can best meet your needs. For example, an auto loan could be your best bet if you want to buy a car.
- Shop around: Next, research and find a few lenders offering the installment loan you’re looking for. You can let each lender know you’re interested in finding out if you’re prequalified for a loan – without impacting your credit score. By giving consent to a “soft pull” of your credit, the lender can tell you about its interest rates, terms, and fees. Then you can compare them!
- Apply: Fill out a loan application. Be prepared to share personal and financial details. You might also be required to submit documents like pay stubs, W2s, and bank statements.
- Funding: If you’re approved, the lender will disburse your funds. The type of loan you’ve received will dictate how long you have to wait for them.
The Bottom Line
An installment loan can help you meet a number of financial goals. As long as you pay it back responsibly, it may also build or improve your credit score.
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