When taking out a loan, there are many things to take into consideration: how will you be able to repay it, what amount do you need, what type of loan you need, and others. Conversely, if you’re someone who values the credit score, you may be concerned about the effect an installment loan has on your rating.
What Is an Installment Loan?
An installment loan is basically a loan that you take at one point in time, then pay it off in installments in regular intervals. They could either be bi-monthly or monthly payments. The loan term may be only a few months, or as long as 30 years. One type of installment loan is a mortgage.
How Would an Installment Loan Affect Your Credit Score?
When you take out an installment loan, it is reported by the lender to credit agencies like Transunion or Experian. Basically, the consumer credit information is gathered by these companies and later compiled into a credit report. It becomes something that guides potential lenders when they need to take a look at your past credit history.
Can Installment Loans Positively Impact Your Credit Score?
Installment loans are a good option for those who are looking to build their credit score. If you take out an installment loan, it can help you in multiple ways. For example, it could help you start building a history of borrowing money from lenders. These lenders report your behavior to the big three consumer reporting agencies. It also adds some diversity to your account, and it can help you establish a strong record of on-time payments too, thus raising the credit score.
Can Installment Loans Negatively Impact Your Credit Score?
Everything has pitfalls, and installment loans are in the same boat. Just like they can help it, these loans can also negatively affect your credit score, leading to its decrease.
For instance, you may think that paying the loan off early may help you escape the monthly installments once and for all. However, whereas you get rid of them, you may also have to pay penalties, and it could also decrease your credit score a little bit.
When you first take off the loan, the lender has to check your credit. That may lead to a small score decrease for a while, but not by a lot.
In addition, 35% of your credit score is made up by the payment history. That being said, if you’re late with your payments, your credit will have to suffer, and you will face the consequences later on.
Before taking out a loan, it’s normal to think about the potential consequences. However, depending on how you handle the situation, there may either be good or bad influences coming from it. With installment loans, the drawbacks are there, but there are also benefits to it.