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Q&A

What is the definition of an installment loan?

An installment loan is a loan where you make a set amount of payments for the length of the loan term with a fixed interest amount. All monthly payments are equal, and each payment includes a certain amount of principal and interest paid over a predetermined amount of time (so there is a defined and established end date). Car loans and mortgage loans are types of installment loans.

What kind of credit check do most installment loan lenders use?

Depending on the type of installment loan, lenders may not check your credit score or credit report; however, they will probably ask for you to verify certain statements you made in your application, such as proof of salary or address.

What is the difference between a payday loan and an installment loan?

Payday loans have a much shorter loan term, and are usually paid back in full by the borrower’s next paycheck. The interest rates are some of the highest in the lending industry, but borrowers can often get money the same day they apply.

Installment loans differ from payday loans in that the length of the term is longer and they have a lower interest rate. It takes a little longer to get the money, but it is still very fast (within 1-2 business days of being approved).

Can installment loans be good for my credit?

Yes, as long as every payment is made on time; however, installment loans in general are more beneficial for people whose credit scores are in recovery mode, or who have little to no credit history. If the only thing in your credit history is a credit card or two, then taking out an installment loan will give you a healthy mixture of differing credit, which, in turn, will raise your score.

Advantages of Installment Loans?

  1. You can get your money fast. Unlike other loans, which can take as long as two weeks to process, you can get your money from an installment loan in two days or less.
  2. Your monthly payments won’t change because your interest rate will be fixed. The amount of each payment will be the same throughout the entire loan term, so there is nothing unpredictable about it. Knowing this, you can make an informed decision before you even take out the loan on whether you can truly afford the monthly payments for a set period of time.
  3. Your monthly payments will be lower than other fast turnaround loans. The loan term is longer than that of other loans, so each payment is affordable and easy.

What is considered to be a bad credit score?

It’s really all relative to who the lender is because each will have its own ideas on what is ‘bad’ and what is ‘good.’ That said, taking most big name creditors into account, there is an average breakdown of credit scores.

  • Average to excellent is defined as any score between 620-850.
  • Bad to low is 300-619.

For a score to be targeted as a ‘bad credit score,’ typically that score falls anywhere from 300 to 499.

Can you get a free credit report?

Yes, you can. There are three major credit bureaus from whom you can obtain a credit report: Equifax, Experian, and TransUnion. Each offers a free report once every 12 months. To receive your free credit reports, go to annualcreditreport.com.

If I want to apply for a loan, what documentation do I need to provide?

Requirements may differ with the loan provider, but there are three things that all installment loans require on an application:

  1. Open bank account
  2. Valid ID (driver’s license or state issued)
  3. Steady source of income

Note: To prove you have a steady source of income, you may be required to provide a paycheck stub.

Writer

Lauren Ward is a widely featured author with her work gaining a presence on top media outlets like Huffington Post, Kiplinger, and CBS News. She has been in the content writing business for almost a decade (9 years of experience and counting) and writes attention-grabbing content focusing on real estate, lending, and personal finance. She has worked with various national non-profit organizations and at Federal Reserve Bank of Richmond. Read more >
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