Instalment loans are not a specific loan product. It is an umbrella term that covers a wide range of loans, from personal loans to mortgages. All of these loans are paid down in fixed monthly instalments over an extended period of time. Hence, they are called instalment loans. Many people take out instalment loans in the hope that they will improve their credit score. Well, there is no straightforward answer to this question.
Instalment loans can be secured and unsecured. They carry high interest rates when they are not backed by collateral. Undoubtedly, instalment loans can have a significant impact on your credit rating, but there are a lot of factors that have a role in making it happen.
Instalment loans are not the same as instalment credit cards. Credit cards are revolving credit, which means you are eligible to withdraw funds after repaying the balance. However, instalment loans are closed after the settlement of the whole debt. You will have to put in a new application to apply for an instalment loan.
The repayment period should be at least 6 months
Instalment loans will certainly help you build your credit rating provided you make payments on time. One missed payment can significantly hurt your credit rating. However, if there are circumstances when you cannot keep up with the due date, you should ensure that you settle your balance within 30 days. A lender will not report your default to credit reference agencies unless you are 30 days past due.
You must have seen some lenders providing small emergency loans in weekly instalments as well. Because these loans are paid off in a month, there will be only two or four instalments. Bear in mind that these loans cannot help build your credit rating even though you pay down the whole debt on time.
Lenders want to see your loyalty and commitment towards payments, which cannot be proved when the repayment period does not extend a month because your financial circumstances will be the same. Long-term instalment loans involve a scope for the ups and downs in your financial situation. When you manage to keep up with payments despite that, you are considered to be a loyal borrower. Your lender will trust your integrity and, hence, will offer deals at lower interest rates.
If you want to improve your credit score, you should choose an instalment loan with a payment period of at least six months.
It will take time to build your credit score
Many people use instalment loans for bad credit to improve their credit score. These loans are also known as credit builder loans. They come with a repayment period of six months. You will be required to repay a fixed monthly instalment every month.
Your lender will report your timely payments to credit reference agencies. As they are reported, you will notice a significant improvement in your credit score. But there is more to it than meets the eye. The extent of improvement depends on your previous defaults and missed payments.
It is vital to note that on-time payments of your instalments loans do not mean that your old inquiries and payment defaults will automatically disappear from your credit report. Hard inquiries will take two years to get off your credit report, and missed payments and defaults take six years. On-time payments in the future can only help show you as a responsible borrower, but it does not insinuate that your previous defaults will not have a damaging impact on your credit score.
Every lender uses their own methods to calculate your credit rating and evaluate the risk involved in lending you. They do not use the credit score that credit reference agencies calculate for you. The benefit of turning over a new leaf is that your past payment behaviour will not have that many bad effects. When your old inquiries and defaults become too old, lenders do not bother about them much. So, if you have improved your payment behaviour, you will likely get much lower interest rates.
On-time payment is not the be-all and end-all
On-time payment is not the be-all and the end-all when it comes to getting a loan at a lower interest rate. Your payment history only accounts for 35% of your credit score. Your lender will also look at other factors, such as the type of credit you have. Your chances of getting approval are high when you show your ability to handle different types of credit like instalment loans and credit cards.
Apart from that, they will look at the history of credit. It gives the record of your loans that you took out and repaid over a period of time. the longer the credit history, the better. Without or with a little credit history, your lender will be sceptical about your repaying capacity. If you do not have a credit history at all, you should use a credit card. Make a small purchase from time to time and pay off the balance on time.
Nobody knows how lenders calculate the risk involved
You may have a rude awakening when you are charged high interest rates despite a perfect credit report. There is no guarantee that you will always get a loan at affordable interest rates if your credit score is good because it depends on the way your lender assesses the risk of lending you money. Nobody knows what methods they use to find it out, and they are also not obligated to tell anyone why they charge high interest rates. The fact is that debts are expensive, regardless of whether your credit score is good or not. You should always try to borrow money only when there is an emergency, and you are completely sure of your repaying capacity.
The final word
Instalment loans can help improve your credit score, provided they are long-term. Weekly instalment loans that are paid off in a month do not help at all. However, bear in mind there are also other factors that influence whether or not lower interest rates should be offered.
Source: empireadda.com
