Installment credit refers to a specific type of loan where fixed payments are made over a predetermined period. This category of loans includes mortgages, car loans, and personal loans.
When you take out an installment loan, you borrow a fixed sum of money and make monthly payments of a specific amount until the loan is fully paid off. The repayment period for an installment loan can range from a few months to several years. The interest rate on the loan can be either fixed or variable, and additional fees such as origination or late fees may apply. Therefore, it’s crucial to carefully review the loan agreement to understand the total amount that will be paid.
What are the Common Types of Installment Loans?
Common types of installment loans include mortgages, car loans, and personal loans. A mortgage is a loan used to purchase a home, with the home acting as collateral. Car loans also require a down payment and use the vehicle as collateral. Personal loans can be used for various purposes and are unsecured, meaning they do not require collateral. However, personal loan interest rates can be high, depending on credit scores.
How Does Installment Credit Differ from Revolving Credit?
Installment credit is different from revolving credit, which allows you to carry a balance from month to month. Revolving credit accounts include credit cards and home equity lines of credit. With revolving credit, you decide how much to charge and repay each month. Carrying a balance incurs interest, and there is a credit limit and minimum monthly payment set by the lender.
How Do Installment Loans Impact Your Credit Report?
Making on-time payments towards installment loans is a primary way to build and improve credit. Payment history is a significant factor in credit scores, and responsible use of credit is demonstrated through on-time payments. Paying off an installment loan early may not have a significantly greater impact on credit scores compared to paying it off on time. Once an installment loan is paid off, it is considered closed, but it will remain on the credit report for up to 10 years and continue to benefit the credit score.
How Can Installment Loans Help Achieve Financial Goals?
Installment loans can help achieve common financial goals such as owning a house or car by allowing for long-term repayment. It is important to only seek out loans that are truly needed and to check credit scores before applying to determine likely interest rates. If necessary, take the time to improve credit scores before applying to secure the best rates and terms.
