An installment loan is a loan where some amount of money is borrowed by you and you pay it back in a series of consistent payments or installments. Most of the installment loans need payments on a monthly schedule. Student loans, car loans, mortgages and personal loans are types of installment loans. Using an installment loan boosts your credit history and enhances your credit scores as well. The enhancement will not be that instant but they won’t be huge. Here are a few features of installment loans you should know about:
- They are beneficial for your credit score
The credit reports collected at the national credit bureaus maintain a record of your history of borrowing money and repaying debt. Every loan shown on your credit report extends your credit history. When making payments on time, in the full amount needed under the loan terms, an installment loan will positively showcase your ability to manage debt like a pro and it will enhance your credit score as well.
A bonus by installment loans is that it enhances your credit mix entirely, the number and types of loans that are showcased on your credit report. The credit scoring model also favors the credit histories with many loan types. Particularly, a blend of installment loans and revolving debt is beneficial for your credit scores by all means. Revolving accounts are those accounts that let you borrow against particular credit limits and make payment of different size each month. Credit cards and home equity loans are such examples. If the revolving account has a major part on your credit portfolio, you can add an installment loan to it, in order to improve your credit scores.
- Installment loans are a win-win
The credit benefits of installment loans promote steady score improvements but don’t introduce any long term and instant improvements. But you can boost your credit score in a short time. If you have credit cards with high level of credit utilization, having an installment loan can help in paying your credit card bills, it helps in boosting your credit scores easily within a few months.
- But it may also cause credit reductions but in the short run
Whenever applying for any type of loan, lender delves deeper into your credit report and this may cause a teensy bit of drop in your credit scores. When your loan is approved, there is a small incremental reduction in your scores as well. This is totally normal. It reflects that borrowers looking for new loan are at a risk of defaulting on other loans. As long as you are consistent in paying off your bills in a timely manner, you can recover your scores in a few months.