Installment loans can be good or bad, depending on how you handle the loan. Installment loans can be good because they can improve your credit score and help you achieve a wide range of important objectives such as home ownership, but they can be bad because they may have expensive fees and interest charges. Plus, if you miss payments, it will hurt your credit score. You can read more about how an installment loan can be good or bad below.
How an Installment Loan Can Be Good
Can help you build credit
Making your monthly payments on time will help you improve your credit score because the lender will report positive information to the credit bureaus. You can also boost your credit score if you have a mix of installment credit and revolving credit.
To see how an installment loan can affect your credit score, check out the free credit score simulator on WalletHub.
Has many purposes
You can get an installment loan for many different things, such as large purchases, debt consolidation, home improvements, medical bills and more. Keep in mind, some installment loans can only be used for specific things, like a mortgage being used to purchase a house.
Can be paid off early
Installment loans can often be paid off early without penalty. If you pay off the loan early, you could save money on interest.
Predictable payments over long periods of time
Typically, you will have to pay back an installment loan on a monthly basis for 1-30 years, depending on the type of loan you get. This gives you plenty of time to repay the balance.
How an Installment Loan Can Be Bad
Can hurt your credit score
If you don’t make your monthly payments on time, you can suffer credit score damage. Additionally, the lender may perform a hard inquiry into your credit history when you apply, which can drop your score by about 5 - 10 points.
May have fees
Examples of fees associated with installment loans include origination fees and late payment fees.
Can only offer one lump sum of money
An installment loan will only give you funds one time, unlike a credit card or a line of credit. If you will need to borrow money more than once, you should reconsider getting an installment loan.
May require you to put up collateral
A few different types of installment loans require you to put up collateral to secure the loan. For example, you will need to use your vehicle as collateral for a car loan.
Now that you know how an installment loan can be good or bad, you can start comparing offers. To see the top-ranked offers, check out WalletHub’s picks for the best installment loans. If you think a personal loan is right for your situation, you can also use our free pre-qualification tool to estimate your potential rates.
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