Attempting to build credit can send you in circles. Maybe you’re trying to get a credit card, but lenders won’t approve you because your credit score is too low. But that’s why you’re trying to get a credit card anyway: to boost your credit score.
It can be frustrating. But the good news is that there are other ways to build up your credit, including taking out an installment loan or personal loan. But how will an installment loan or personal loan help your credit? And what kind of loan works best? Here’s what you need to know.
What is an installment loan?
Installment loans involve requesting a specific amount of money to borrow and paying it back over a set amount of months, plus interest. These can be federal loans (such as some student loans) or private loans (such as mortgages).
Installment loans can help build credit because you’re showcasing financial responsibility when you pay them back. Since payment history is 35% of your FICO score, on-time, in-full payments are a huge credit boost.
Installment loans tend to have longer repayment periods, which means you’ll be paying a lot more in interest. For example, if you lease your car, you could be making monthly payments for about three to five years.
Are installment loans a good idea?
While usually easy to get, installment loans have some downsides. One missed payment could hurt your credit report, so if you don’t have a steady income to repay a loan every month, it’s hard to justify getting one.
Be mindful of interest when you’re paying back your installment loan.
Let’s say you get a $1,000 loan with 15.00% interest to repay in one year. Your monthly payments would be almost $90. You’ll pay about $1,083 in total, so you’re spending an extra $83 to borrow $1,000.
What is a personal loan?
A personal loan can be a type of installment loan. You can ask for a personal loan from a bank, credit union, or other lender and pay it back with interest over a set amount of months. But unlike most other installment loans, you can use it for almost anything.
If you’re looking to pay off a major chunk of debt, for example, you can take out a personal installment loan. With a personal loan, you’ll typically pay less in interest.
There is also a single-payment personal loan, where you take out a lump sum of money and repay it all at once, usually with interest included.
Are personal loans ever a bad idea?
Personal loans are a great option if you’re paying off high-interest debt or other bills quickly. But they aren’t for everyone.
Payday loans are a type of single-payment personal loan. Unless you’re sure you can pay back your loan by the time your next payday comes around, payday loans should be avoided.
Getting a payday loan can put you deeper into debt if you don’t end up paying it off at the end of the loan term. It’s best to look into other types of loans.
Will an installment loan or personal loan help your credit?
Installment loans and personal loans will help you build credit. Once you get approved, adding a new account or varying your credit mix will boost your score.
Installment loans can help establish credit if you have decent or even poor credit. It might take three to six months to start building credit, but it can set a strong foundation for your credit report.
Personal loans are great for getting rid of major debt by reducing or eliminating high-interest bills. You can consolidate your debt to have one manageable monthly payment, usually with one low interest rate.
The best loan for you depends on your situation
Can an installment loan or personal loan help your credit when you’re looking to build it up? Yes. The type of loan you choose should depend on where you are in your credit journey.
If you’re at the beginning, a small installment loan can help you start off on the right track as long as you make your payments every month. If you need to consolidate your debt or pay off high-interest debts in a shorter period, you might take a larger personal loan.
Regardless of which loan option you choose, always look at the fine print. Review your term limits, loan options, and lenders. You can build credit as long as you’re responsible and knowledgeable about your loans.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|