Installment Loans To Rebuild Credit In 2023 (Plus 2 to Avoid At All Costs)
Even the most financially savvy consumers can sometimes suffer setbacks that affect their credit scores.
Fortunately, you can always recover from bad credit, no matter how low your credit score is.Using installment loans to rebuild credit is one of the best ways to turn things around and increase your credit score.
While you should be proactive about remedying your bad credit, that doesn’t mean you should rush out and jump at an installment loan that might not be a good fit. .
Here’s what you need to know about the different types of installment loans that work best for building credit. With this information, you can find an online lender or credit union that offers them.
What’s an Installment Loan?
An installment loan is a type of loan where you borrow a fixed amount of money all at once. You then repay the loan over a set number of payments called installments. Many installment loans have fixed payment amounts, so amounts don’t change over the life of the loan. If the loan has a variable interest rate, payment amounts can change.
Two Types of Installment Loans That Can Help Rebuild Credit
Repaying an installment loan can help rebuild your credit, but not just any loan will do. The best installment loans for improving bad credit do more than end up on your credit report. Ideally, they should also be:
- Readily accessible at your current credit score
- Affordable in terms of interest rate, monthly payment, and origination fee
- Productive for more than boosting your credit score e.g., auto loan to buy a car
If you can’t find an installment loan that meets these requirements because of your bad credit score or financial situation, consider building your credit before borrowing from a lender.
Finding an installment loan with these features will be highly beneficial in rebuilding credit..First, if you can’t qualify for a loan, the whole discussion is moot, so accessibility is non-negotiable. You also need to be able to pay back your loan amounts in full, or you’ll only damage your already poor credit. That means affordability is also essential. Finally, you should never sacrifice your budget to save your credit. So remember to use your credit for things you already need and budgeted for.
Now, here are some types of installment loans that are likely to meet these requirements.
Auto Loans
If you want an installment loan to build credit, you should always consider an auto loan. This type of loan meets the requirements we mentioned above more often than other kinds of loans.
First, an auto lender will usually have less stringent underwriting than a mortgage lender or even a personal loan provider. An auto loan is a secured loan, so they’re more accessible than other installment loans.
Second, the lower the interest rate, the better, and auto loans tend to have cheaper rates than personal loans. Again, because your car will serve as collateral, a lender will often be able to give you a lower rate.
Third, if you’re going to finance a purchase, it should be something that you were already going to buy. Most people need or at least very much want, a personal vehicle.
Credit Builder Loans
A credit builder loan is another convenient way to improve a bad credit score. As the name implies, building credit is their purpose.
You can often get one from an online lender or a credit union. A credit builder loan is more likely to meet the requirements from the checklist above.
First, credit builder loans are specifically for borrowers with bad credit. They wouldn’t be much help if they weren’t accessible to people that need them the most. That’s why they’re often fairly easy to qualify for, like other bad credit installment loans.
Similarly, they wouldn’t be very good at increasing anyone’s credit score if people always end up defaulting. Every lender recognizes this, so they know it’s in their best interest to make these loans affordable.
Finally, credit builder loans avoid the typical need to spend lots of money to increase your credit score.
They don’t finance purchases the same way a student loan, auto loan, or another traditional installment loan would. They function more like a share-secured loan, which lets people borrow against the money in their savings account.
Instead of transferring the loan funds upfront, the creditor puts them in a savings account during the life of the loan.
Only after the final loan payment clears, does the lender release the balance to the borrower. For example, if you obtain a $1,000 credit builder loan and submit all your payments on time, at the end of the loan you’ll receive the $1,000. At that point, they’re free to spend the money, invest it, or deposit it into another bank account.
How Credit Strong’s Accounts Help in Building Credit
Credit Strong’s accounts are great examples of a credit builder loan. Timely payments will help you establish a positive payment history month by month on your credit report.
Credit Strong reports your debt payment activity to all three bureaus:Experian, Equifax, and TransUnion So positive payment history will show up in your credit report with each bureau and potentially improve your credit scores with each bureau.
The company did a study to see just how effective their accounts are at building credit. The results were inspiring. On average, customers who used a Credit Strong credit builder loan saw the following effects on their FICO® score:
- 25-point increase within three months
- 40-point increase within nine months
- 70-point increase within twelve months
Of course, exactly how long it takes to rebuild credit varies.Your ability to replicate these results with a Credit Strongcredit account depends on how responsible you are during your loan, just like any other loan.
To reliably increase your score, you have to make timely payments for the entire loan term.
If you miss even one, you might do further damage to your credit score. Remember, payment history is worth 35% of your FICO Score 8, making it the most influential credit score factor.
While payment history is the most important factor in calculating your score with all three credit bureaus, there are other factors you should consider. To make the most out of your credit building account, you should understand all the aspects that make up your credit score. To learn more, here’s a great resource on Credit 101.
You can learn more about Credit Strong’s credit builder account pricing here.
Using Secured Credit Cards to Build Credit
A secured credit card is not a type of installment loan, but anyone looking to improve a bad credit score should consider using a secured card as an additional way to build credit. Like auto loans and credit builder loans, they often meet all three of the requirements we mentioned at the beginning of this article.
First, if you have bad credit history or a thin credit report, secured credit cards are much easier to qualify for than an unsecured card or unsecured loan. With a secured credit card you have to pay an upfront deposit equal to the available credit of the card, the lender isn’t taking much risk.
Second, if you pay your outstanding credit card balance every month, you should never have to pay interest. We highly recommend setting up autopay to ensure you never forget a payment and accidentally hurt your credit history.
Third, you can use credit cards to finance the small monthly purchases you already make as part of your monthly budget. Spending more than you can comfortably pay can get you in problems, so sticking to your budget when using a credit card is key.
In fact, you’ll never be at risk to miss a payment as long as you spend less than you have in your bank account. It’s also important to keep your credit utilization ratio (your balance divided by your credit limit) at a manageable level. Approximately 30% of a FICO® Score is based on information about amounts owed, so maintaining a low credit utilization can help increase your credit score.
Will an Installment Loan Hurt my Credit Score?
Using an installment loan to rebuild your credit and having it lower your credit score would be frustrating, but that shouldn’t happen if you practice good credit hygiene. In some cases, an installment loan can temporarily cause a small drop in your credit score but this is not a cause for concern.
A temporary drop in your credit score can happen when you open a new account due to the average length of your credit decreasing. But, if you have some patience, you’ll see your score go up as you progressively build payment history and the average length of your credit increases over time.
If you choose the right installment loan, you’ll have no trouble affording the payments. Even with bad credit, you should be able to get an installment loan with a reasonable interest rate and monthly payments that fit your budget.
As long as you pay on time every month, an installment loan should help increase your credit score over time. Improving your payment history should outweigh any credit score decreases caused by a hard inquiry on your credit file, a temporary drop in the average length of your credit, or the hit to your credit mix when you pay off the loan.
Installment Loans to Stay Away From
Like we said before, not every installment loan is a viable tool for rebuilding credit. We’ve covered the most desirable qualities in an installment loan, but let’s also touch briefly on the ones that you should avoid.
Some loans are just not worth it. Here are two examples.
Payday Loans
A payday loan is a short-term loan with extremely high interest. A huge finance fee will be due on the borrower’s next payday.
As long as you pay the large fee every payday, you can defer paying off the loan balance forever. But, the costs of a payday loan are so high that many people who use payday loans get trapped in an endless cycle of debt and stress.
Payday loans can be tempting since payday lenders move fast and rarely check your credit score. They’ll lend money to just about anyone with a bank account and a job.
However, payday lenders don’t usually report their payment activity to the credit bureaus, so they are not an option to build credit. Given their astronomical costs and no credit building benefits, we highly recommend avoiding payday loans.
Car Title Loans
Not to be confused with a traditional car loan, car title loans have prices that are every bit as excessive as payday loans.
Their loan amounts are higher, which means defaulting on a car title loan can be very expensive. Even worse, these types of loans require the title on your car as collateral, so failing to pay them back will cost you your credit score and your vehicle.
Truthfully, any personal installment loan with sky-high interest rates is not a good choice when you’re trying to rebuild your credit score. Stay away from any debt that is going to be difficult for you to pay back. It’s just not worth the risk.
Conclusion
If you’ve recently seen a dip in your credit score, it may be a great idea to use multiple installment loans to rebuild credit points that you’ve lost.
Look for accounts that are accessible and affordable, even if you have bad credit history or a thin credit file. Also, try to use the loan for something you need and have already budgeted for.
If you’re currently looking for a high-quality installment loan, consider working with an online lender or a credit union.
You should choose a lender that reports your account activity and payment history to all three major credit bureaus. Otherwise, it won’t end up in your credit history or your credit report, which means it wouldn’t affect your scores.
To minimize the negative impact of the credit inquiries on your score, you should try to submit any applications for new credit within a two-week window. If you apply to every lender within that window, it should only register as one hard inquiry on your credit report.
Once you choose the right installment loans and get approved, remember to make all of your payments on time! As long as you do that, you will see your credit score go up over time. Remember that building credit takes time, so stay patient and disciplined. Before you know it you’ll be celebrating your great credit! Finally, if you’re looking for an installment loan to start building credit or rebuilding your credit, you should take a look at Credit Strong’s pricing and plans to find a credit builder installment loan that’s right for you.
