Installment credit brings several benefits including payments that never change and the chance to increase your credit score
I often like to use the analogy that debt is a tool to either build something spectacular or to smash things up really badly.
Just like there are different types of hammers that are used for specific needs, there are different types of debt for specific needs.
Trying to use a sledge hammer for drywalling is just going to smash up your walls. Trying to use credit card debt for any type of cash need is going to destroy your financial life.
One of the most popular types of loans is installment credit. This type of loan can help you get back on your feet, put a roof over your head and even help improve your credit score.
Use this guide for the difference between installment credit and other debt and how you can use it to accomplish your financial goals.
What is Installment Credit?
Installment credit is any loan on a fixed payoff schedule, usually with a fixed interest rate and payments over a set period of time. This includes loans like mortgages, car loans and personal loans.
That fixed- nature of installment loans is an important difference with other types of loans. It helps borrowers better understand and plan for payments and it gives lenders a better idea of how the loan will be repaid and default rates.
Installment credit is also called non-revolving debt, different from revolving debt like credit cards and lines of credit. Installment loans can be secured, meaning you put up some kind of collateral, or unsecured. If you fail to make payments on a secured loan, you risk losing the asset you put up as collateral, for example your house or car.
Defaulting on an unsecured loan will still hurt your credit score but you won’t have to worry about the repo man knocking on your door.
Installment Credit Examples
Installment credit is available in a lot of loan types including mortgages, car loans, personal loans, equipment loans and student loans.
Some installment loans have very specific uses like student loans and mortgages. You’ll usually have to prove that the money is going to a specific purpose or it may even go straight to the seller without hitting your bank account.
Other installment loans are less strict on how you can use the money. These include personal loans and some types of refinancing where you cash out some equity.
PersonalLoans is one of the larger platforms for personal loans, offering installment credit of up to $35,000 on terms up to seven years.
I recently highlighted Upstart as an interesting new company in installment loans for its unique lending model that takes into account more than just a borrower’s credit score.
Do Installment Loans Help Your Credit Score?
Installment loans help to build your credit in several ways.
- Making monthly, on-time payments on your loan helps to build a stable credit history which accounts for 35% of your credit score.
- Installment credit is non-revolving credit, a better type of credit compared to revolving loans. Non-revolving credit hurts your credit score less because payments and rates are fixed.
Understanding how credit scores work is an important part of picking the best types of loans and using new credit to increase your score. Installment loans like debt consolidation are a great way to simplify your debt and increase your FICO at the same time.
How is Installment Credit Different from Revolving Credit?
Debt gets a bad name on a lot of personal finance blogs. Installment loans can actually be a strong financial tool but there is one type of debt that is a problem for many people, revolving credit.
You probably know revolving credit by its most common form, credit card debt. By comparison, installment loans are non-revolving debt.
- Monthly payments on revolving credit change depending on how much you owe. Monthly payments on non-revolving loans is usually the same for the life of the loan.
- You continue to borrow and repay revolving credit forever, paying a little each month but can then borrow up to your limit. You borrow once on non-revolving (installment) credit and pay it off over a set period.
- When you take out an installment loan, you know exactly how long it will take to repay. This isn’t true for revolving (credit card) debt.
Debt is not a bad thing but you can do bad things with it. The trick is to understand how types of debt and loans differ and how to use them without getting in trouble.
Installment Loans for Bad Credit
Installment loans through unsecured personal loans can help bad credit borrowers rebuild their credit score for lower rate loans. While some installment loans like mortgages and car loans have strict lending requirements and other installment credit like student loans can only be used for specific purposes, personal loans can be used for anything.
- Debt consolidation
- Medical expenses
- Wedding loans
- Home repairs and remodeling
- Emergency cash
Finding the best rates on an installment loan is a matter of knowing which website is best for your loan type and credit score. Each personal loan site caters to a different type of borrower for different types of loans.
| Peer to Peer Lending Site | Loan Fees | Credit Score Needed | Loan Rates | Notes |
|---|---|---|---|---|
| Personal Loans Apply Here | 5% | 580 | 9.95% to 36.0% | Best p2p loan site for bad credit borrowers. Lower credit score and three options including peer loans, bank loans and personal loans. |
| SoFi Loans Apply Here | No Fee | Not available but higher than most, around 680 FICO | 5.99% to 16.49% (fixed rate) 5.74% to 14.6% (variable rate) | Special discounts for variable rate loans. Offering $100 cash back on peer loans. |
| Upstart Apply Here | 1% to 6% | 620 | 6.25% to 30.0% | Best peer loans for graduates and no credit history. |
| BadCreditLoans Apply Here | No Fees | 520 | Vary by State | No fees and lowest credit requirements for lenders |
| Lending Club Apply Here | 1% to 6% | 640 | 6.95% to 35.89% | Low rates on p2p loans for good credit borrowers. |
There are a lot of benefits to installment loans, from payments that never change to help in increasing your credit score. Like any type of debt, you need to understand how to use installment credit and how it differs from other loans.