Installment loans are where a person borrows a certain amount of money and pays it back in regular installments, or payments. Most of these loans, such as personal loans, mortgages, and student loans, require monthly payments. Getting an installment loan may enhance a person’s credit history and improve their score slightly. Read on to find out how an installment loan can help a borrower build credit.
How an Installment Loan Benefits Credit Scores and Reports
Equifax, Experian, and TransUnion document a person’s borrowing and repayment history, and each loan on a report extends and broadens that history. As long as payments are made in a timely fashion, installment loans are a positive reflection on a borrower’s ability to manage their debt, and credit scores will improve.
Another benefit of installment loans is an enhancement of a borrower’s credit mix, or the variety and number of accounts appearing on their report. Most credit scoring algorithms favor histories with diverse loan types, and a combination of revolving and installment debt may benefit a person’s credit score.
Installment Loans Pull Double Duty
The credit advantages of installment loans are broad: They promote a gradual score improvement without short-term results. However, in certain situations, installment loans can significantly boost a person’s credit score within a short time. If the borrower’s credit cards are highly utilized, an installment loan can boost their score if they use it to pay down those balances.
Short-Term Credit Score Decreases
Borrowers should remember that any time they apply for an installment loan, the potential lender will make a hard inquiry against their credit report, which will cause their score to drop slightly. When an application is approved, a score may drop as well. This is normal, and it’s a reflection of the statistical fact that borrowers are more likely to default when they take on new debt. As long as all bills are paid on time, a person’s credit score will usually recover within months.
The primary reason to ask for an installment loan is to meet a need for education, a home, a vehicle, or better debt management. As long as these loans are handled responsibly and repaid on time, they can help build a borrower’s credit profile. Visit Maxlend Loans for more information or to request an installment loan.