What you should know

• Installment credit is widely available from banks, credit unions, online lenders, and specialized loan companies, which offer structured repayment plans for various needs.
• Installment credit can improve your credit score if you make timely payments.
• It is easy to shop around and compare offers from different lenders to find the best installment credit loan for your needs.

Loans have helped many borrowers fulfill their dream of buying a house or a car. Still, some people resist taking out loans because they fear being overwhelmed by debt repayments.

When buying big-ticket items, making monthly payments is more manageable than paying them all at once. Installment credit allows you to borrow money when you cannot afford something upfront.

If you have been thinking about getting installment credit, here are some questions to think about before taking the plunge.

What is Installment Credit?

Installment credit, also known as installment loans, is a closed-end loan option that allows you to borrow funds for a specific amount and repay them in installments over a set period. The amount of your loan and each monthly payment is predetermined, along with the number of monthly payments you would pay over the agreed loan term. In most cases, you get to decide your loan term from a few months to years, helping you to set your monthly payments according to your budget.

Due to their features and functionality, installment credit loans are ideal for financing significant expenses like buying a car, a home, or any major appliance. That doesn't mean you can't use installment loans for small cash needs.

How Does Installment Credit Work?

Once you're approved for installment credit, you'll generally get the funds or the item you're buying right away. You’ll make regular payments, each including a bit of interest, which is why they’re called "installments." These loans are "closed end," meaning the account is closed once the balance is fully paid off. Lenders look at how reliable you are financially when considering whether to give you an installment loan, and your credit score can influence the interest rates and conditions you’re offered.

What Are Some Examples of Installment Credit?

Installment loans can be either secured or unsecured. While secured loans are loans that require collateral, unsecured loans need no collateral at all.

Here are common examples of installment loans.

• Auto Loans
• Mortgages
• Student Loans
• Personal Loans

Learn More: Different Types of Installment Loans

Common Uses of Installment Credit

Installment credit allows you to spread payments over time for significant purchases. Here are some common uses:

Financing Major Purchases (Cars, Homes, Appliances)

Paying for a large purchase on a credit card can be costly. A fixed-rate loan can be used for almost any purchase. Installment loans are perfect for buying vehicles and homes, using them as collateral. If you need a new appliance, an installment loan lets you spread the cost over time.

Consolidating High-Interest Debt

Consolidating debt can be great if you get a lower interest rate than you currently pay. You can roll multiple debts, usually high-interest, such as credit cards, into a single payment. Consolidating will help you reduce and reorganize your debt to potentially pay it off faster. Debt consolidation can also be useful if you're dealing with manageable debt and want to simplify multiple bills with different interest rates, payments, and due dates.

Covering Emergency Expenses

For unexpected costs, installment loans provide a quick lump sum with fixed payments, making budgeting easier. Secured loans, like home equity loans, use your property as collateral. They typically offer lower rates than credit cards, making them cost-efficient for emergencies.

Building Credit

You can build credit with installment loans, but your score could slightly drop when you first take out the loan. Making regular payments on time may help you establish a positive payment history.

Remember that missed payments may have the opposite effect depending on how you manage your loan. This means that the impact on your credit is largely based on your actions, and you can improve your credit score by making on-time payments to an installment loan like a mortgage or auto loan.

Learn More: Can I Use Installment Loans To Build Credit?

What Factors Determine Your Installment Credit Loan Eligibility?

When you're ready to get an installment loan, understanding key factors that affect your eligibility is essential! Understanding these factors can significantly increase your chances of getting approved and landing excellent loan terms. Check out this list of what may impact your loan eligibility.

Credit Score

Your credit score reflects your financial health and influences the interest rates and terms you receive. A lower credit utilization shows responsible borrowing, appealing to lenders. Different loans have varying score requirements, often higher for mortgages.

Income Verification

Lenders often need proof of your income to ensure you can manage loan payments. Providing recent pay stubs, tax returns, and bank statements demonstrates financial stability. Accurate, up-to-date documents will streamline approval and boost chances for favorable terms.

Employment History

A stable employment history indicates your ability to make consistent payments. Lenders favor candidates with minimal job gaps and long tenure at their jobs. Having documentation like pay stubs or employer letters can bolster your application.

Debt-to-Income Ratio (DTI)

DTI measures the percentage of income used for debt payments. A lower DTI, ideally below 36%, shows sound financial management and increases loan approval chances. Improving DTI can be achieved by increasing income or reducing existing debt.

Residency Status

Your residency is also a critical factor. Lenders prefer stable living situations and might require proof of permanent residency or citizenship. Documentation like utility bills or lease agreements can support your application. Meeting residency requirements is essential to avoid loan denial.

Learn More: How To Get Monthly Installment Loans With Bad Credit

What are the Advantages and Disadvantages of Installment Credit?

If you're considering an installment loan to help your finances, weigh its advantages and disadvantages. We’ll unfold the pros and cons of installment credit to guide you in making the right decision:

Pros of Installment Credit

• The most significant advantage of installment credit is that you know what your monthly payment amount will be. This can help you plan your budget accordingly to avoid missing a single payment.
• Installment credit makes it easy to cover significant expenses, finance big purchases, and pay later in multiple installments. These payments are usually affordable and manageable without burdening your budget.
• Getting an installment loan and making regular payments can help you build or rebuild your credit scores. You can check with your lender to ensure that your on-time payments are reported to the credit bureaus.

Cons of Installment Credit

• Unlike revolving credit, installment credit only allows you to borrow a set amount from your loan eligibility amount. You must apply and fulfill the requirements for another loan if you need additional funds.
• In long repayment terms, you might feel like making regular payments for an extended period. If you can pay off your loan early, check whether your lender charges any prepayment penalties.
• Even though the interest rates might be lower than other credit options, you could end up paying more in total interest, especially if the loan is stretched over a long period.

Learn More: 8 Super Advantages of Installment Credit

How Are Installment Credit and Revolving Credit Different?

Installment credit and revolving credit serve different needs and function in distinct ways. Installment credit provides a borrower with a lump sum of money upfront. This must then be repaid over some time with fixed monthly payments. These payments continue until a pre-set end date. Common types of installment loans include mortgage loans, auto loans, and personal loans.

On the other hand, revolving credit allows borrowers access to funds up to a credit limit. They can borrow, make monthly payments, and borrow again as needed. Credit cards are a common type of revolving credit. Unlike installment loans, revolving credit doesn't have a fixed repayment period.

Learn More: Revolving Credit vs. Installment Credit: What's the Difference?

Can Installment Credit Loans Help Improve Your Credit Score?

Installment loans are a great way to boost your credit score because they may add a record of on-time payments to your credit report. Plus, they can diversify your credit mix, which is a factor in your credit score that looks at the different types of accounts you have—convenient if you've mainly used credit cards.

Remember that taking out an installment loan might not immediately boost your score, and it might even dip initially. The key is managing your account responsibly, ensuring you keep up with your payments on time. This careful approach may help your credit score grow steadily and healthily over time.

Thinking About Applying for an Installment Loan?

Looking to tackle some financial challenges? Installment credit can be your go-to solution. CASH 1 has a range of installment loan options tailored just for you. If you need a larger loan, secured installment loans might be the perfect fit. Alternatively, if you just need a little extra cash, unsecured installment loans could be the way to go. Feel free to chat with one of our friendly loan officers for more details, or you can simply apply online to access your funds in no time.

Tips for Managing Your Installment Credit Responsibly

Responsibly managing your installment credit can be an excellent solution to relieve financial issues and set yourself up for success. It's an excellent way to cover unexpected expenses like a doctor's bill, car repair, or high utility bill. If you are new to budgeting or having a loan, your installment credit can be challenging. Follow these strategies to avoid missing a payment or negatively impacting your credit.

Understand Your Loan Terms

Knowing your loan term helps you plan your finances and choose the best repayment schedule for your needs. Consider these factors before getting a loan.

• Monthly Payments: Shorter terms mean higher payments; longer terms lower them.
• Total Interest: Shorter terms typically incur less interest; longer terms usually cost more.
• Affordability: Match your financial situation to the monthly payment.
• Interest Rates: Shorter terms often have lower rates, though longer terms might ease short-term affordability.

Create a Monthly Budget

Creating a budget is one of the best things you can do for your finances. Managing your debt without a budget puts you in a vulnerable position because you don't know where or how much of your money is spent. If you are often afraid to check your bank account and unsure where you're overspending, creating a budget is the answer.

Make Your Payments On Time

The best way to avoid late fees and hits to your credit score is to make your payments on time. When you create your budget, you'll have a financial plan and set aside some of your monthly money for your installment credit payment. Setting up automatic payments with your lender will prevent you from forgetting your payments.

Pay More Than the Minimum When Possible

Paying more than the minimum required payment amount will clear you of your debt sooner and reduce the interest you owe, saving you money over time. Your credit score may also improve when you pay off your debts faster. A higher credit score will benefit you in various ways, like lowering down payments and interest rates for future financing. Be sure to read your agreement to confirm no prepayment fees. It negates the benefits of early repayments.

Keep Track of Your Loan Balance

Regularly checking your loan balance can inform you about what you owe and help you better manage your payments. This awareness can also prepare you for when your loan will be paid off and may reveal opportunities to refinance or change your loan terms if necessary. Understanding your balance is crucial for evaluating your financial health and credit status.

Learn More: Tips To Pay Off Debt

The Final Word

Installment loans can help you reach important goals, like buying a house or a car. With these loans, you can pay for something over a longer time instead of all at once. Making your payments on time and paying off the loan as promised can help improve your credit.

But like any money borrowing, you should only get a loan if needed. Before you apply for a loan, it's a good idea to check your FICO® Score to see what interest rates you might get. If your score isn't great, you might want to take some time to improve it first to get a better loan deal.