Before you take out an installment loan, find out how it will affect your credit.
Applying for any type of credit is a financial decision that shouldn’t be taken lightly. Before committing, you’ll need to consider your reasons for taking out the loan, compare your lending options and work out whether you can afford the repayments.
In addition, you should consider how taking out an installment loan will impact your credit score. Our guide will help you learn the ins and outs of installment loans and your credit.
What is an installment loan?
Installment loans allow you to borrow a large sum of money over a longer period of time, usually between 6 and 60 months. You make payments on the principle and interest back to the lender in monthly installments. This type of loan is meant to help finance a car purchase, home renovation or any other large purchase.
How long does an installment loan appear on my credit report?
It 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.
Installment loans you can apply for
Check the websites of any providers you’re interested in to confirm they operate in your state of residence.
How does an installment loan affect my credit?
The most common type of credit score is a Fair Isaac Corporation (FICO) score, which is made up of five components. You can better understand how your installment loan affects your credit by understanding how the components are weighed.
- Payments made to your installment loan. Your payment history makes up 35% of your FICO score so making timely payments on your installment loan should be a priority.
- How much you have left to pay. Your amounts owed, or how much you have left to pay, makes up 30% of your FICO score.
- How long your credit history is. The length of your credit history makes up 15% of your credit score. Installment loans are for longer terms, so they can have a potentially good impact on this component of your score.
- The type of credit being used. 10% of your FICO score is made up of four types of credit. Installment loans are one of these.
- Inquiring about a loan or taking on new credit. If you apply for an installment loan, even if you aren’t improved, it can be listed on your credit score. In addition, any new loan can stay on your file for up to 2 years.