One of the factors that affect your credit score is the credit mix. Creditors want to see that you can handle different types of credit, including installment accounts and revolving accounts. A common question people ask is “What is an installment account?”
An installment account is a fixed loan amount that’s paid back in installments over a set period of time. If you don’t have an installment loan in your credit mix, consider whether it may make sense to apply for one.
How Installment Loans Work
When you take out an installment loan, you receive a lump sum of the loan amount, and you’re expected to pay it back in regularly scheduled payments, which are called installments. Most installment loans have a set payment amount each month until the total amount has been paid in full. Some installment loans may require weekly or annual payments rather than monthly.
Installment loans are different from revolving credit such as a credit card. On revolving accounts, you can reborrow money you’ve paid back, but installment loans only allow you to borrow the money once.
Different Types of Installment Loans
Installment loans can be secured or unsecured. Some examples of different types of installment loans include:
- Personal loans – Personal loans may be taken to consolidate debt, finance a major purchase or handle an unexpected emergency. They’re usually unsecured, which may mean a higher interest rate than a secured loan.
- Mortgages – A mortgage is an installment loan that’s secured by the property you’re financing. Most mortgages have installment payments for 15 to 30 years.
- Auto loans – An auto loan is secured by the vehicle you’re purchasing, which can be new or used. Vehicles are typically financed over a period of two to seven years.
A home equity loan is another example of an installment loan. This is a loan you can take out for home renovations, and it’s secured by the equity in your home. It’s not the same thing as a home equity line of credit, which is a revolving account.
Why Take Out an Installment Loan?
Taking out an installment loan and paying it as agreed is a great way to establish credit and prove to potential lenders that you are responsible for borrowed money. Installment loans make it possible to handle emergencies or make major purchases while financing your purchases over time. You know exactly how much you need to pay each month, so there are no surprises when it comes to your budget. You also know exactly how many more payments are left on your loan before it’s paid in full.
Taking Care of Your Credit
To have the best possible credit score, pay all of your bills on time and avoid overborrowing. Check your credit report periodically to make sure all the information on it is accurate. Errors on your credit report can bring your score down and affect your ability to borrow at the best rates.
If you find any errors on your credit report, make sure you dispute them right away. Dovly is an automated credit repair engine that can help you with this process. Try it risk-free with our free membership tier. Contact Dovly today.