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Installment loans: Do they impact credit scores?


What’s an installment loan? It’s a type of loan repaid in installments, i.e., paid back over a long period depending on the agreement between the borrower and the lender. These loans come with a fixed interest rate and require regular monthly payments. Part of the monthly payment goes to the amount borrowed, while the other part is for interest on the loan. The amount varies depending on the agreement you have with the lender.


The installment loan is for you if you are a monthly earner and need money to cover some unexpected expenses. It allows you to borrow money for any purpose and repay it in small amounts monthly with interest. Most loans you find in the market are installment loans, for example, mortgage loans, personal loans, no credit check loans, auto loans, student loans, buy now, pay later loans, etc.


How installment loans work

Installment loans are issued by banks or other financial institutions. They give borrowers a particular amount of loan, and in return, the borrower pays back the money in a small amount over a set period with interest. The payment is usually made every month, and it can go on for several years, depending on the terms and conditions of the institution.

Here are a few of the most common types of installment loans:


Personal Loan

It’s a type of installment loan that you can use for anything you want. The lenders do not need to know the reason for borrowing. You get to pay back the money monthly over a fixed period. Depending on your agreement with the borrower, it can take 2 to 3 years.


Mortgage Loan

Mortgage loans are taken to purchase assets like houses and buildings. The assets are used as collateral for the loan, and the credit term is usually very long. The bank covers the cost of the asset, and the house becomes yours, but you have to pay back a certain amount with interest every month.


Auto loans

Auto loans are used to cover the cost of cars and other types of vehicles. If you need a car, a bus, or any kind of vehicle, you can take out an auto loan, which covers the cost of the vehicle.


Student Loan

There are two types of student loans; federal and private. The common one is the federal loan, which is available for every student to pay their tuition fee. The loan covers all the fees for the student, and they pay back a set amount of the money with interest every month. The credit term is usually longer than other kinds of loans.


Benefits and risks involved in taking an installment loan


Here are some of the benefits and risks involved in taking an installment loan:


Benefits of Installment Loans

  • A consistent monthly payment: You pay a fixed amount every month, including interest.
  • Credit score Boost: Establishing a payment history on your bank account helps boost your credit score.


Risks involved

  • Long-term payment: You might be stuck paying a loan for the rest of your life if you do not make payments regularly.
  • Fixed amount to pay monthly: it might be a disadvantage to some as they might not be able to meet up with the payment every month.


How does an installment loan affect your credit score?

Installment loans are credit accounts, just like credit cards. If you want to build your credit score, it’s advised to take an installment loan. The monthly payment will show up on your bank account and boost your credit score. If you have a bad credit score, you can consider taking a loan with a cosigner who has a good credit score. That’s how installment loans affect your credit score.




If you decide to take out an installment loan, make sure to have a backup plan to meet the monthly payment. If you think you can keep up with the monthly payment, an installment loan is your best option when you need money.


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