Taking out any type of loan can have a positive or negative impact on your credit report. Make all of your repayments on time and an installment loan can strengthen your credit rating. But late or missed repayments show up on your credit report for years, making it difficult to qualify for other types of financing.
If you’re applying for an installment loan, you might want to check your credit report first even if you haven’t ever missed a payment. Sometimes lenders make mistakes that can be easily fixed.
What is an installment loan?
An installment loan is type of financing where you borrow a lump sum of money and pay it back over a period of time, usually between six and 60 months. Lenders typically charge both interest and fees on an installment loan, unlike the fixed fees that come with a payday loan. This type of loan is meant to help finance large purchases, such as buying a car.
How long does an installment loan appear on my credit report?
How long an installment loan appears on your credit report depends on whether you currently have an installment loan and have been on time making payments.
If you had an installment loan and it’s been paid in full. The account will remain on your file for up to 10 years from the date of last activity (DLA).
If you currently have an installment loan and have made late payments. Late payment history will generally remain on your file for up to 7 years.
If you have an overdue installment loan. Accounts considered “not paid” generally remain on your file for up to 7 years.
If you had an installment loan that went to a collection agency. Accounts that go to collection agencies are generally listed on your file for up to 7 years from the date the account file became past due.
Compare online installment loans
Check the websites of any providers you’re interested in to confirm they operate in your state of residence.
An installment loan can help your credit score by allowing you to build a positive credit history. All you need to do is make your repayments on time.
A positive credit history shows that you’ve paid off debts on time in the past, making you appear more trustworthy to lenders in the future. It can boost your credit score in a few ways:
It can be proof of on-time repayments. Making repayments on time counts for 35% of your FICO credit score and is the most important factor in your credit score.
It can add to your credit history. How long you’ve been paying off debt makes up 15% of your FICO score. Some lenders also have requirements for your length of credit history, which they can find by looking at your credit report.
It can diversify your credit types. How many different types of debt you’ve repaid can also boost your credit score — it counts for 10%. Just having an installment loan on your report might give you a few extra points.
Look for a lender that reports to credit bureaus
If your installment loan provider doesn’t report to a credit bureau, an installment loan can’t have any impact on your credit score at all. It can still hurt your credit score if it goes into collections — that gets reported to credit bureaus regardless of the lender.
If you’re interested in improving your credit when you borrow, go for a lender like OppLoans or Rise that report to at least one of the three main credit bureaus: TransUnion, Equifax and Experian.
How can an installment loan hurt my credit?
There are a couple ways having an installment loan can hurt your credit:
It can be proof of missed payments. Missing a payment after your lender’s grace period not only tacks on fees, it also shows future lenders that you’re not always reliable.
It shows up as a credit inquiry. Every time you apply for credit, be it a loan or credit, it shows up as a credit inquiry on your report and counts for 10% of your credits core. Even if you don’t get approved. This knocks your credit score down a few points, which you can make up with on-time repayments.
A missed or late repayment will follow you around for years. That’s why it’s important to make sure you can comfortably afford the loan amount, terms and interest rate before you apply for an installment loan. You can use our monthly repayments calculator to find out how much you’ll pay on a loan.
4 tips for paying back an installment loan
Stick to a budget. Setting aside funds each month for your repayments can help ensure you make repayments on time to boost your credit score.
Sign up for autopay. This can help you avoid accidentally miss a repayment just because you forgot. Some lenders also offer a discount.
Consider repaying early. You can save on interest by paying back your loan early as long as your lender doesn’t charge a prepayment penalty.
Reach out if you need help. Think you might miss a repayment? Talk to your lender as soon as possible. Some might be able to work with you to avoid that negative mark on your credit report by adjusting your loan term.
There’s an error on my credit report. What can I do?
If you find an error on your credit report, make sure that it’s showing up on all of your credit reports — not all bureaus are in contact with each other. Gather information showing that the report is incorrect before reaching out to your lenders.
Typically, lenders ask you to send documentation to prove there was an error. If they accept your claim, they’ll reach out to the credit bureau to correct the error.
Applying for an installment loan always has an impact on your credit report. Whether it helps or hurts your credit rating depends on how you repay your loan. Pay it back on time and it can boost your score for up to 10 years.
Typically it takes around 30 days for any item to show up on a credit report, including new installment loans and hard credit inquiries.
No, reporting your new installment loan is your lender’s responsibility.
A traditional payday loan can only affect your credit if it goes into collections or you’re otherwise unable to pay it back. That’s because payday loans technically aren’t loans but a cash advance that you pay back in full on your next payday.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over six years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth's passion is writing about innovations in financial services (which has surprised her more than anyone else).
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