Installment Credit 101: What Is It and How Do You Get It?

What is installment credit?

When it comes to borrowing money, you have a lot of options. Some loans are created for a specific purpose, such as auto loans and mortgages. Others, including credit cards, give you more freedom in how you spend and even let you borrow money on a rolling basis.

Credit typically falls into one of two buckets: installment credit and revolving credit. Here’s a look at key differences between these two types, and what you need to know about applying and qualifying for installment credit.

What is installment credit?

Installment credit is a form of debt that has a set amount and payment period. Common forms of installment credit include mortgages, car loans, personal loans, and student loans.

When applying for installment credit (a.k.a. an installment loan), you’ll typically review the following terms:

  • Principal loan amount
  • Interest rate (fixed or variable)
  • Term length
  • Monthly payment
  • Origination and other fees

Note that despite their similarities to other types of loans, payday loans do not fall into this category. This is because the lender usually requires that you pay back the loan in full after a short period, rather than in installments.

Key differences between installment credit and revolving credit

Installment credit works like this: Say you want to buy a car, fund your wedding, or cover another large expense. You can go to a bank and request a loan. In this case, assume you borrow $20,000 and promise to pay it back over six years with an interest rate of 3.99% APR.

For the length of your loan, you will have a monthly payment of $312.81. When you finish paying off your loan, you will have paid $2,522.50 in interest.

When it comes to revolving credit, think about how credit cards work. Most credit cards have a credit limit, which caps how much money you can owe at any given time. As long as you don’t reach your credit limit, you can keep borrowing money from the bank by using your credit card and paying the balance at the end of each month.

Further, on a credit card, your monthly payment is based on your current balance and there’s no predetermined payoff period. So you can keep borrowing money without having to go to the bank.

How to get an installment loan

Different types of installment loans have different credit and income requirements. But in general, the better your credit, the better chances you have at getting approved with a good interest rate.

If you’re not sure what your credit score is, you can check it for free, such as through AnnualCreditReport.com.

Experian, a major credit bureau, lists the different FICO credit score ranges as follows:

  • Exceptional: 800+
  • Very good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 579 and below

If your credit score isn’t at least in the good range, you may still get approved for installment credit. However, you might not necessarily get a favorable interest rate.

To improve your credit score, review your credit report to see what needs work. Dispute errors you find and ensure all listed credit accounts are in good standing.

Your credit score isn’t the only factor lenders will consider, however. If you have high credit card balances or a lot of other debt, your debt-to-income ratio might be high. A high debt-to-income ratio can scare off lenders because they might think you can’t pay back all your debt.

Where to get an installment loan

The easiest way to get installment credit is through your local bank or credit union. Depending on your needs, though, you might want to shop around to get the best deal. You can find a good selection of personal loans online. And if you’re applying for a mortgage, a broker can give you more options.

If you’re buying a car, you can get an installment loan through your bank directly or through the dealership where you’re buying the car. Unlike your bank, the dealership can reach out to multiple lenders to find the best rate for you.

Make sure to read the fine print on an installment loan before signing. There, you’ll find any hidden costs or conditions. For example, some loans penalize you if you pay off the loan early. You’ll also want to understand what happens if you’re late on a payment or default.

How installment credit affects your overall credit

According to FICO, your payment history is the most important factor in your credit score. As you make on-time payments, the lender reports that information to the three major credit bureaus: Equifax, Experian, and Transunion.

If you’re not careful, though, an installment loan can hurt your credit. Making late payments or defaulting on your loan, for example, will negatively impact your score.

If you borrow too much, the debt burden can also weigh on your credit score. How much you owe is the second most important factor in your credit score. Be sure to borrow only what you can easily afford to repay. Putting too much of your income toward debt will strain you financially and make it easier to start slipping on payments.

Should you get an installment loan?

Installment credit is a common way to get the funds to buy something you need. But if you don’t have stellar credit or already have a lot of debt, you might not get approved for more. Before applying, work to build your credit and pay off your other debt first.

If you do it right, an installment loan can help you reach your financial goals. But sacrificing your financial security with high interest rates and a large debt load isn’t worth it.

Before applying for installment credit, take stock of your financial well-being and needs. Make a decision based on facts rather than emotions. You’ll be much better for it in the long run.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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