A credit building installment loan can help you boost your credit score in several ways. However, you need to understand how they work and when they’re appropriate.
Additionally, you will want to know how to identify a good credit building installment loan from a less desirable one. Lenders also differ greatly, so you should know how to choose a reputable one.
How Does an Installment Loan Work?
A credit building installment loan offers a lump sum of money. You pay off your loan in fixed payments over a set repayment term. You can’t add to the amount like you can with a credit card or line of credit.
Instead, every payment pays a portion towards the outstanding balance and a portion towards the interest charged for loaning you the money. If you pay your payments on time, your loan ends on the specified loan end date.
Some lenders allow you to make extra payments at any time without costing you more. Others charge a pre-payment penalty to make up for the interest they would have earned over the entire loan term.
How much or how little you can borrow and your interest rate depends on the lender. Interest rates can vary greatly between lenders. Additionally, some lenders require collateral such as a car or home to back the loan. Others don’t.
How Can a Credit Building Installment Loan Improve Your Credit Score?
A credit building installment loan can only help you if you manage it properly. You need to make your payments on time and in full every time. If you can manage that, here’s how one can improve your credit score.
Strengthen Payment History
Creditors want to see a history of consistent, timely payments. Consequently, your payment history is the most important element of your credit file. It accounts for 35% of your overall credit score.
However, it will take time for you to see a significant positive effect. Consistent, timely payments do promote the growth of your credit score, but it isn’t instant.
Additionally, missing a payment or paying late can impact your credit score negatively. Credit experts suggest automatic payment withdrawals to ensure you meet your loan obligations.
Improve Credit Mix
The credit score algorithm favors a combination of credit forms. Compared to payment history, credit mix is not as important and only accounts for 10% of your credit score.
However, if you’ve always used credit cards, adding an installment loan could improve your credit mix. When you’re trying to improve your credit, every little bit helps. Nonetheless, it doesn’t make sense to take out an installment loan just to improve your credit mix.
When Does a Credit Building Installment Loan Make Sense?
Loans are debts and they must be repaid with interest. Consequently, it only makes sense to use credit building installment loans in certain circumstances. Here are a few examples of when one might help.
Consolidate Credit Card Debt
Credit cards are convenient. If you manage to pay the balance off every month, it isn’t an issue. However, all too often people pay less than the full amount. They continue to use their credit card until they reach their limit. Then they might switch to another card and repeat the process.
Eventually they discover they are carrying a huge amount of debt. Their payments barely make a dent in their outstanding balance, because interest accumulates so quickly. Credit cards almost always have high interest rates.
Additionally, credit cards charge “compound” interest. That’s interest charged on the amount you borrow AND interest on whatever remains after you’ve made a payment. Essentially, you pay interest on the interest. This makes it very difficult to reduce the amount you owe.
In this case, a credit building installment could make sense. If you can obtain a credit building installment loan with a lower interest rate, you could pay off all your credit cards, make regular payments, and pay less.
Since every payment lowers your balance, you will also know precisely when you’ll be out of debt. It’s simpler, less stressful, and could be more economical if you find a good loan.
Planning to Make a Major Purchase
Unfortunately, traditional lenders aren’t likely to grant you a loan if you have less than pristine credit. Luckily, you have other options.
Of course, you should only apply for credit when you need it. However, if you find you must make a major purchase, a credit building installment loan could help you buy and build your credit simultaneously. For instance, you may need a vehicle. It’s not something you can do without, so you need to find a way to fund it.
Luckily, some lenders will issue a credit building installment loan for a car or truck and they won’t ask you to put up your vehicle as collateral either. You can borrow the full amount and don’t need a 10 or 20% deposit.
Plus, a good credit building installment loan could offer a lower interest rate than one you could get through a dealer.
Finding a Good Credit Building Installment Loan
We mentioned some loans are better than others as are lenders. Here are some of the features you’ll want in both.
No Minimum Credit Score
Many lenders set a minimum credit score requirement. If you’re looking to build your credit, you probably won’t meet this standard.
Luckily, some lenders place less emphasis on credit and more on your life situation. If you have a steady income, you can find a loan.
Reasonable Income Requirement
Many lenders want to see a higher income, because they consider people with poor credit high risk. This is regrettable, because many people that earn less are quite capable of repaying a loan.
Luckily, you can obtain a credit building installment loan if your net monthly income is at least $2,000, providing it came from the same source for at least three months.
No Proof of Income
Always look for a lender that offers digital income verification. Otherwise, you will need to jump through many hoops during the application process. This includes supplying proof of income such as pay stubs or a letter from your employer.
Digital income verification is simple, fast, and safe. The lender confirms your direct deposits through bank statements, with your permission.
No Fees or Penalties
Some lenders charge unnecessary fees and penalties and try to suggest they are accepted industry charges. You don’t need to pay these.
The first is an “origination fee” which is just a fancy term for an administration charge levied for opening your account. This can cost you between 0.5% and 8% of your total loan amount.
Another commonly charged unnecessary cost is a pre-payment penalty. The lender charges this to make up for interest lost if you pay extra payments or pay your loan off early.
Fast Loan Process
From application form to funds release, your loan process should be fast and simple. A good lender provides 24/7 access and a streamlined application form.
They also provide a decision within minutes once you submit your details. If you want to move forward, it should be easy and fast. They should send your loan contract for digital signature.
If you sign your contract during business hours, money should be in your bank account within 24 hours. Otherwise, they should release funds the next business day.
Get a Credit Building Installment Loan Through FlexMoney
If you’re wondering which company you should use for a credit building installment loan, here is a quick recap of what FlexMoney offers:
- Loans between $500 and $15,000
- Repayment terms between 6 months and 5 years
- Simple application form
- Fair credit review process based on artificial intelligence
- No minimum credit score requirement
- Various income sources considered including employment, self-employment, and pensions
- Electronic income verification
- No collateral needed
- No origination fee or pre-payment penalty
- Quick decision & funds release
- Automatic payments to ensure you meet your loan obligations.
FlexMoney is licensed to lend in Ontario, British Columbia, Alberta, Nova Scotia, Saskatchewan, Newfoundland & Labrador, Prince Edward Island, and Yukon Territory.
Unfortunately, we can’t help you if you are currently enrolled in an active bankruptcy, consumer proposal, or credit counselling program. We can’t consider your application if your income source is Employment Insurance or government benefits related to COVID-19 either.
If you want to know more about FlexMoney or you’re ready to start the application process, please visit our website. You can also find an in-depth FAQ page there that answers commonly asked questions.
Get your credit building installment loan today and get on with your life.