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Installment Loans and How They Can Improve Your Credit Score

Updated: Feb 11

Installment loans are a credit solution that can help you get highly-priced items without having to shell out a massive amount of money. But aside from helping you acquire more expensive properties, installment loans may be used to help you improve your credit records, as they broaden your credit mix.


How does an installment loan impact your credit score? Keep on reading to find out.


What Are Installment Loans?


An installment loan is a consumer credit product that involves lending a certain amount of money to a consumer who executes or signs a promissory note. This note is the legal contract for attaining a loan wherein the borrower writes the amount, repayment period, and interest rate they will pay.


Aside from the borrower, the lender will also sign the promissory note. The borrower and the lender will also need to sign a security agreement simultaneously. Meanwhile, the borrower will also have to provide collateral as a backup, which is usually in the form of a security interest.


In return for signing the promissory note and the security agreement, the borrower will receive the money that they have been approved for. However, the borrower must agree to make the monthly payments at a pre-determined frequency.


How Do Installment Loans Work?


Installment loans are usually a very convenient way to purchase expensive items. For example, if you need to buy a vehicle, you might finance a cheaper car instead of buying an expensive one. Moreover, you can use an installment loan to purchase items such as furniture or large home appliances.


This type of loan is a good way for you to purchase expensive items without spending too much money or making a huge down payment. Additionally, a lender may grant you an installment loan to help you finance a home or car.


How Do Installment Loans Help Raise Your Credit Score?


Borrowers with a good credit score typically use installment loans to purchase a car, a house, or finance a business. This practice helps them broaden their credit mix, which is essential for building a good credit score.


Applying for an installment loan gives you more opportunities to build a positive payment history. However, some lenders may only approve you for a certain amount. If you need more money, you can try applying again.


An installment loan will also help you with the "risk weighting" formula. The FICO formula takes into account the fact that when you start repaying an installment loan, you may be charged a late fee. This late fee can have a negative impact on your credit score. However, they will not charge the late fee for a specific period because of the installment loan.


Final Thoughts


If you are interested in improving your credit score, an installment loan can be a good option. However, you should make sure that you have enough wiggle room in your finances to pay the loan back to use the loan for this primary purpose.


Are you looking for installment loans in Birmingham, AL? Apply at First Finance Company Birmingham. First Finance has helped thousands of people through fast and affordable loan solutions, whether they’re for unexpected repairs, expenses, or budget shortfalls. Start an application online today or visit us in person at our physical location.

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