Borrowing money should be easy. The process of filling out an application is not exactly an algebra test. Specific personal and financial information is all that is generally required. Of course, the lending institution reviewing the application also has its own criteria. Lenders may be unwilling to provide an installment loan to someone who might prove to be a high-risk candidate. If the lender does not receive timely payment or, worse, suffers a default, then the lender loses money.
A person with no credit might be the most honest and responsible person in the world, but he/she is still an individual without a credit history. Hence, he/she is not the greatest candidate for an installment loan.
This does not mean, however, installment loans are out of the grasp of someone with little or no credit.
The Basics of an Installment Loan
Unlike a credit card, an account involving revolving debt, installment loans are based on the issuance of a fixed loan amount. The loan is intended to be paid back over a set amount of time. A personal loan for $1,500 may need to be repaid within 24 months. Each month, a minimum amount is required to be paid.
Personal loans do not require collateral. Hence, the only basis the lender goes by to determine eligibility is the applicant’s credit history. This is where someone with no credit ends up running into slight trouble. The trouble is “slight” because it may be overcome.
Easy Credit Option
One way to build up a credit history would be to apply for a department store or gasoline credit card with a low limit. $500 in credit is not too much of a risk for a major bank supporting the card. Charging a debt and promptly repaying the debt does build up an actual credit history.
Not everyone has time to do this, though. A borrower may need a loan right away. There are other steps that could be undertaken.
A cosigner is someone who puts his or her name on the loan application and, in essence, accepts responsibility for repaying the loan if the primary borrower defaults. A person without a credit history can always ask someone with a solid credit history to cosign. Doing so greatly increases the chances of the loan being approved.
Exploring Regional Borrowing Options
A mailbox can be stuffed with many offers for low-interest loans. The financial institutions may be headquartered in far away states and major metropolitan locations. The advertising for the loans might promise a lot, but the actual delivery for someone with no credit might be disappointing. In other words, “the big bank” denies the application.
Local banks and credit unions may be more willing to approve a loan for someone with no credit. This is not to suggest the local enterprises are a source of guaranteed approvals, but the chances of being approved may be higher.
Checking Out Available Options
While looking local is advised, so is looking everywhere. Specifically, look for lenders known for approving applications for those with no real credit history. The internet makes researching such information fairly easy. A lender that has made it standard business practice to be friendly to those interested in applying for a loan who may be worried about their lack of credit.
Examining Alternative Lending Methods
The unique business model of peer-to-peer lending is available to those interested in borrowing from private investors. Peer-to-peer loans are designed for people who have very limited borrowing options. Peer-to-peer loans exist as investment opportunities for those hoping to make a great return on any funds they put forth on a loan. If the two parties are able to work a borrower-lender arrangement together, both may end up being very happy.
The Interest Rate Issue
Low-interest rates may not be easy to find when someone has little or no credit history. Certain borrowing sources are known for presenting very high rates of interest. Troubled borrowers need to accept a high rate of interest may prove to be unavoidable.
Interest rates are not forever nor are specific loans. Once a decent credit history is built up, refinancing and acquiring a new loan at a lower rate of interest is possible.
While it’s a great thing to pay off your student loans, especially if they’re the only installment loans you have to deal with, you may be wondering if paying them off completely is going to affect your credit score. After all, once your student loans are paid off, you won’t have any more loans to worry about, which could mean that your credit score will be negatively impacted, right? Not exactly, actually.
What Goes Into Your Credit Score
- Your payment history and how often you paid on time.
- The amount of available credit you’re currently using.
- How many times you’ve applied for new credit recently.
- The various types of credit you have.
- The duration of your credit history.
When it comes to your situation, the most important factor for you is that you’ve paid your student loans (hopefully) on time. Your effort to pay back your loan in a timely manner can actually help your credit score, not hurt it. When it comes to your FICO score, one of the three credit bureaus you need to think about, paying your credit back on time is the most important factor.
Additionally, the duration of your credit history will have a positive impact on your credit score. Since you’ve probably had your student loans for at least a few years, this will only help you, even if it was your only loan through all that time.
What Happens After You Pay
Since the types of credit you have play a role in your credit score, you may be wondering what will happen once your installment loan is no longer there. Even though you will have paid your loan off completely, the information about your now-paid student loan will remain on your credit report for as long as ten years – it’s not going to come off your credit report the moment you make that last payment. So long as you were financially responsible with that loan, this is a good thing for your credit rating. Creditors will see that you had a loan for an extended period of time and that you paid it off on time and without delinquencies.
Preparing to Go Down a Few Points
Even though paying your loan off is, overall, a positive thing, and even though it won’t severely impact your score, it is possible that your score will drop a few points. Hopefully, your credit score is high enough at this point that that won’t make much of a difference. However, if you want to give your credit score the best chances for being as high as possible, consider getting another installment loan. The best way to max out the types of credit factor is to have one credit card and one installment loan open.
Spending Your Leftover Cash
Now that you won’t be making monthly payments toward your student loan, what should you do with all that extra cash! Before you spend it on something big or go on a shopping spree, determine if there’s a way to use it wisely in an effort to increase your credit score even more. Since you were able to survive for so long without it while you were paying your loan, this shouldn’t be too difficult.
It’s tempting to put all that extra money into a savings account, but although you do want to maintain a savings account on your own, you may be better off paying down other types of debt you have first. For example, consider paying off one of your credit cards. It’s better to pay off the balance in full each month, on time, rather than to carry a balance over from month to month. Using your credit in this way will build your credit and increase your score.
Alternatively, you can open up a new installment loan and continue making the same payments toward it that you were making toward your student loan. If you do need a big item, like a car, for example, this is a great way to get it while continuing to build your credit. Since you already are used to making payments each month, it won’t be hard to keep up with the new loan.
Debt has its positive side. Borrowing money to pay for things eliminates the problem of not being able to front money out of pocket. The credit card industry is worth billions of dollars thanks to the ability to lend money through the use of a simple plastic card.
Debt has benefits for the short-term. As debt grows and grows, credit scores end up suffering. A bad credit score brings forth a ton of problems. Revolving debt deriving from lines of credit or credit cards, in particular, can wreck havoc on credit reports and personal finances.
What is Revolving Debt?
Revolving debt seems like an odd way of describing a type of borrowing. Upon closing one’s eyes and imaging a revolving door of people going in and out of building without stopping, the description makes more sense. The credit limit on a revolving debt account fluctuates. In other words, if the maximum borrowing limit is $3,000, a person who pays $500 on a maxed out card now has roughly $500 in credit reopened to be accessible once again.
Installment loans do not work this way. This is why installment loans do not damage credit as much.
What is Installment Loan Credit?
Installment loan debt, unlike revolving debt, is finite. Borrowing $3,000 on a personal or secured loan means a one-time issuance of $3,000 is given to the borrower. He or she has a set amount of time in which to pay off the debt. Each month, as money is paid to reduce the debt, the balance goes down. Again, this type of loan is not a line of credit account. “Re-borrowing” on the previously paid debt is not possible.
So, why does revolving debt factor more negatively on a credit score than installment debt?
One problem with the presence of significant revolving debt centers on questions regarding how much of this debt is comprised of legitimate necessities. While it is true that people who are “stuck” for money may be forced to continually charge necessities, a great many people suffering from credit card debt woes are in the position they find themselves due to borrowing to cover lavish spending. Doing so does not exactly paint a fiscally-responsible picture of someone.
Therein lies one of the greatest curses associated with revolving debt: such debt creates a perception an individual simply lacks any financial control. Credit scores end up dropping dramatically to reflect a perceived lack of control.
The Credit Utilization Ratio
The credit utilization ratio refers to how much debt afforded to a borrower on a revolving debt account is actually being used. Anything more than 30% is going to reflect negatively on a credit score. Installment debt does not come with a credit utilization ratio since the amount, as previously noted, is finite. Hence, installment debt can not have as severe an impact as revolving debt.
A lesson is found in this explanation. Paying down revolving debt is a must for those who wish to improve their credit score.
It sounds too good to be true that you can get a personal loan without having your credit checked. This sounds like great news to people who need money but don’t have a good credit score or for those who don’t want another inquiry into their credit history. Unfortunately, while some lenders do offer this service, it’s not quite as great as it sounds like at first.
There are a variety of these types of loans out there. They may be called a no-credit-check loan or installment loan. It’s common for people to take out payday loans or a loan from a car title lender for this purpose. However, this isn’t a wise choice, no matter how bad you need the money right now.
You should always be wary of any type of credit that doesn’t involve a credit check first. There have even been laws in place to stop this type of lending in some areas. Lenders have gotten crafty, though, now dubbing their no-credit-check loan as an installment loan or a payday installment loan. These loans may come with even more perks, like longer time to pay them back. It’s also common for a lender to move to another state or being operating under a different name when lawmakers start to close in on them. Ultimately, the better loan terms sound, the worse they’ll be for your financial future.
Note that there’s usually a difference between a no-credit-check loan and a payday loan, although both should be avoided. Payday loans typically need to be paid back in one lump the next time you get your paycheck. On the other hand, a no-credit-check loan can be paid back over several months. Both loans range in amounts, sometimes as low as $100 to as high as several thousand. Also, both loans can be repaid in fixed payments and you’ll receive your money within 24 hours, if not sooner.
What’s the problem, then? Often, these no-credit-check loans have incredibly high interest rates, some even exceeding 200%. Consider this: if you want to take out a no-credit-check loan for $2,600 and that loan comes with an 18-month repayment schedule and a 187% interest rate, you’ll end up paying close to $8,000 in the end. The reason the interest is so high is because the lenders don’t have any idea if the borrower is able to pay back the loan or how long it will take them. The only thing the borrower needs in order to qualify for a loan like this is some sort of regular income and a bank account. The reason you need a bank account isn’t just to collect your loan money, either. The lender will often require electronic payments to be made from your bank account. This can put you in an even worse financial situation than where you started.
The main problem with no-credit-check loans is that the borrowers who need them often don’t have a high income to start with, making it incredibly difficult to pay back the loan along with the high interest rate. Without being able to get other types of credit, you won’t be able to consolidate the debt when it starts to get out of hand. That’s exactly what the lenders of these types of loans count on: people who are so desperate for money right now that they’re willing to pay back an exorbitant amount over time. Since the interest rate is so high, the lender will still make a profit even if you end up defaulting on the loan.
There’s even more to be worried about, though. The interest rate isn’t the only extra money you’ll need to pay back. Often, these loans come with all sorts of fees, like credit insurance, which can raise the total percentage you’ll be paying back.
It’s common for people who take out a no-credit-check loan to need to get another loan in order to consolidate or to take more than the approved length of time to pay the original loan back. Both options can put you in a cycle of debt that becomes increasingly difficult to escape.
While it may be tempting to try and improve your credit score by diversifying your credit types, this may not be the answer in all cases. Before trying to improve your credit score by borrowing additional of credit, make sure you really need it.
Understanding your credit score is the first step towards determining if borrowing more money is the right choice for you. There are a number of factors that influence your FICO score. They include:
- Payment History (35%)
- Balances Owed (30%)
- Length of Credit History (15%)
- Types of Credit Used (10%)
- New Credit Lines (10%)
Since having different types of credit can help boost your FICO score, you may be considering taking out a loan or financing a new purchase to get the credit lift. As a general rule, never borrow money solely for purposes of building credit. To help you make sure you are doing it for the right reasons, here are some questions to ask yourself.
Do you truly need the loan?
Unless you are absolutely positive that you can repay the loan, refrain from borrowing new credit unless you truly need it. Once you have established that you do need the loan, look for one that carries a 0% interest rate. This can be a great way to maintain a steady cash flow while waiting for a guaranteed source of cash, like an inheritance, to come through.
If this is not the case, it may be wise to avoid taking any new loans or credit. Not only will this end up costing you more money in fees and interest payments, but chances are that it will not give your FICO score the boost you are expecting.
If you truly need the loan and can get a solid interest rate, then go for it. Even better, if you decide to take out an installment loan to purchase a new or used car, you can likely get better rates, a longer term and a higher borrowing limit.
What is the true cost of the loan?
Another factor to consider is the true cost of the loan. If the loan you plan to take out costs less than the debt you currently carry, it may be worth considering. Generally, installment products offer consumers higher limits, lower rates and more time to repay than most credit cards. Average installment loan rates range from 8% to 10% while credit card rates tend to be much higher. In some cases, credit card interest rates can be as high as 24.99%.
If you plan to use an installment loan to consolidate your debt, this may be a great way to improve your FICO score. Not only will this allow you to consolidate all of your debts into a single payment, but you may be able to save on interest as well.
Should I take out a loan if I have cash?
Say you want to make a large purchase and have the cash on hand to do so. Taking out an installment loan and saving your cash may make sense. If you can get a solid rate, say 4% on the loan, you get cheap capital without tying up all of your cash.
If cash flow is a concern and you know for sure that you can make all of your payments, the small amount of interest you will pay may just be worth the risk. For example, if you borrow $10,000 and can secure an APR of 4%, the $400 in annual interest might pale in comparison to the benefits you get from having that emergency stash.
Even better, with a rewards credit card, you can make your stash work for you. If you know of a rewards credit card that pays around 4-5% cash back on purchases, you can easily offset the cost of the loan by using it to pay for things you would have to buy anyway.
In rare instances, if your credit is on the edge of a FICO threshold, it may make sense to go ahead and take out a low-interest loan that you can repay fairly quickly. Since many mortgage lenders make credit decisions around the 640 marker, an installment loan may be just what you need to bump you into that range.
Know Where You Stand
If you are in the process of improving your FICO score, borrowing money you do not need probably is not the answer. When making this decision, remember to consider your existing finances, your credit goals and your ability to repay the loan. After answering these questions, you should have all the information you need to make an informed decision.
The average American owes more than $6,000 in credit card debt. Credit cards can be your saving grace in times when you need quick and reliable cash, but they can also be your downfall if you run into debt problems along the way. If you are looking to pay off your debt, you are probably researching different ways to lessen the amount that you owe. Unfortunately, there may be a pressing question that is hindering you from making a move: should you pay off your credit card debt first or your installment loans, such as your car payment, student loans and mortgage?
In general, paying off your credit card debt first is a wiser choice because the interest rates are so high. A typical credit card has an interest rate of about 15 percent and when you start to become past due on your payments, your dues increase to a significant amount. Some credit card companies will even increase your interest rate if you’re consecutively late on making payments.
Another point to consider is that your installment loans are paid in equal monthly increments and rarely increase. Credit card debt often carries a monthly premium that fluctuates according to any outstanding balance that is found on the account. This is why it is crucial that you pay more than the minimum amount due each month to start tackling the debt itself.
Focus on Credit Cards First
There are a myriad of good reasons for making your credit card debt a priority over your installment loans. For one, you’re able to improve your credit score by making minimum payments on your account. Each time you make a payment to tackle that outstanding debt, you’re increasing the amount of available credit. This means you’re lowering the amount of credit you’re using against your score, which results in a higher FICO score. Paying an installment loan is great for your credit report and looks good to future lenders, but it doesn’t do much as far as impacting your credit utilization.
Also, your FICO score accounts for every single credit card that you have open. If you have multiple outstanding credit cards, your score will decrease significantly because so much credit is being used in your name. Having a couple of installment loans and steadily paying them off each month allows you to have access to better rate cards, thus lowering your overall dues because you’re getting access to lower interest rates.
Focus on Interest Rates
One number will jump out at you when you compare your credit card statements with your mortgage or auto loan bill: the interest rate. Unless you have an excellent credit score and are with an amazing company, chances are pretty good that the interest rate on your credit card account is double what you have on any other loan in your name. Because of this reason, you need to tackle the credit card debt before anything else for no other reason but to get rid of the ridiculous interest rate you’ve been paying.
You can try to negotiate with your credit card company to lower your rate, but this may be short-term and still higher than what you pay on your installment loans. Keep in mind that if you have debt, you can’t simply close out your account and hope it goes away. You may not have access to your available credit anymore, but you’ll still be hounded down by creditors looking for you to pay.
Many mortgage loans and automotive installment payments allow you to take advantage of tax benefits and write-offs at the end of each fiscal year. This comes in the form of deductible interest and can be quite a large amount when you receive your tax refund after filing. Credit cards, on the other hand, don’t offer any tax benefits to those who have outstanding accounts. Because of this reason, you should get rid of your credit card debt first before tackling those installment loans.
If you recently transferred your credit card debt onto a lower 0% new member account, you need to get rid of the debt before this introductory period expires. It’s never a good idea to be in debt on one credit card only to transfer it to another and deal with the same headache.