You may have heard the term “installment loans” but aren’t sure what it actually means. A common credit product is an installment loan. You might even already have one or more of these credit products.
Installment loans, also known as installment credit, are closed-ended credit accounts. They are repayable over a specified period of time. These loans may or not contain interest. Continue reading to find out more about the different types of installment loans available and how they work.
You receive an installment loan as soon as you apply for it. It is paid off in regular, scheduled installments. Sometimes with interest. The amount you owe on each installment is usually the same for a certain number of weeks or months or even years. The account is permanently closed once the loan has been paid in full.
A revolving loan account is an alternative to an installment loan. It works just like a credit card. Revolving credit is not like installment credit. It’s open-ended. It can be used repeatedly as long as the account is open and in good standing.
There are many types of installment loans. They can be secured or unsecured. This is how you will need collateral or assets to repay the loan. The interest rate, repayment terms, and penalties for each loan are different. It doesn’t matter what you’re looking for; it’s a brilliant idea to shop around.
These are the most popular types of installment loans.
An auto loan can be used to pay for a car, new or old. The vehicle you purchase is the collateral for an auto loan. Fixed interest rates and repayment terms are typical for auto loans. They typically last between two to seven years.
A mortgage is used to purchase a house. The property secures it. There are many types of mortgages. Most mortgages are paid over 15-30 years.
Student loans, whether federal or private, are unsecured. They can be used to pay for undergraduate, graduate, and other post-secondary education. A student loan is not like other installment loans that you have to repay immediately. You can wait until you are employed and graduate to repay your student loan.
A personal loan does not have to be used for one purchase, unlike an auto loan, student loan, or mortgage. Personal loans can be used to pay unexpected bills, consolidate debt, repair your home, or make repairs to your car. Personal loans are usually unsecured.
While shopping, you might have seen a buy-now-pay-later loan (also known as point of sale financing). Some retailers offer this option at checkout. You can spread your payments over several installments rather than paying upfront for the item you buy. The retailer and the purchase can vary in terms of how long it takes to repay.
An installment loan, like all credit types, has its pros and cons. It all depends on your particular situation. These are some things to keep in mind:
Your credit score could be affected by how you use an installment loan. Guess what? Your credit score could have an impact on the amount of your installment loan. When deciding whether or not to lend you money, lenders consider your credit score. The terms and interest rates you are offered can be affected by your credit score.
It can be challenging to predict how an installment loan will affect your credit score. This is because different credit scoring models are used by companies such as FICO (r) or VantageScore (r). These companies also calculate scores differently.
Your financial situation will determine how an installment loan will affect you. Credit bureaus report not all installment loans. However, if an installment loan is reported, it can help or hurt credit scores if you’re:
Remember that your credit score can be affected by other factors. You’ll need to be aware of them all if your goal is to have good credit scores.
An installment loan is a good option for many reasons, including consolidating debt or buying a large item. If you can make the monthly payments and repay the loan on time, it could be an excellent option for improving your credit score.
Keep in mind that if the installment loan you are considering applying for has an interest, you may be eligible for a lower rate. You may still qualify for financing if your credit is below-average. However, it might come with a higher rate of interest.
An excellent place to start is to assess your credit score before you consider an installment loan. You can access AFCA to check your credit score. AFCA allows you to access your TransUnion(r), credit report, and VantageScore 3.0 credit score every week. It won’t affect your credit score. AFCA is available for everyone, not just Capital One customers.
It’s important to continue checking your credit reports after you have received the loan. This could allow you to see where you stand. It could also help you keep control of your credit.