Can An Installment Loan Help You Build Credit?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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If you’ve financed a car or home, you’re well aware of installment loans and how they work. But did you know that there are installment loan products that are solely offered to help build credit? 

They’re referred to as credit builder loans and are slightly different from traditional personal loans. However, they’re a tool worth considering for credit newbies or those who’ve had credit issues in the past. 

In this guide, you’ll learn more about how both installment and credit builder loans work. You’ll also discover the benefits of using a credit builder loan and how they can help you build credit and save money. 

Build Credit and Savings with Self

Self, also known as Self Lender, offers an easy way to build your credit scores with a credit builder loan and credit card.

What are Installment Loans?

An installment loan is a debt product that requires payments for a set period. You’ll generally pay a set amount each month for principal and interest until the loan is paid off. To illustrate, if you get approved for a 5-year, $20,000 installment loan with a 9 percent interest rate, your monthly payment will be $415.17. Plus, you will pay $4,910.03 over the life of the loan. 

Lenders offer two types of installment loans – secured and unsecured. Secured loans require collateral, like a car, home, or boat, to get approved. This gives the lender reassurance that they’ll recoup their losses if you default on your payments as they can seize your asset and resell it. 

Unsecured loans pose more risk to the lender as they are not secured by collateral. Instead, the lender reviews your credit profile, income, and outstanding debts to determine if you can make monthly loan payments. Some lenders assess a higher interest rate to account for the elevated risk of loss. 

Do Installment Loans Build Credit?

There are two ways installment loans help build credit: 

  • Payment history: It accounts for 35 percent of your credit score. So, making timely debt payments each month is pertinent if you want to attain good or excellent credit. Installment loans can help you establish a stellar payment history if you make the payments on time over the loan term. But if you fall behind on payments and your account reaches 30-days past due, your credit score could drop by several points. 
  • Credit mix: Lenders like to see a healthy combination of installment and revolving (i.e. credit cards) accounts on your credit profile. Although it only accounts for 15 percent of your credit score, an installment loan could help optimize your credit mix if you currently only have credit cards.

Should You Get an Installment Loan to Build Credit?

When you apply for credit, a hard inquiry is generated, and your credit score could drop by a few points. This ding is only temporary, though, which could make applying for an installment loan worthwhile. 

Considering an installment loan solely for the sake of building credit? A credit builder loan is worth considering. 

Build Credit and Savings with Self

Self, also known as Self Lender, offers an easy way to build your credit scores with a credit builder loan and credit card.

What Is a Credit Builder Loan?

A credit builder loan is an installment loan that caters to consumers with little to no credit. It can also help you restore your credit health if you have bad credit. 

Unlike traditional personal loans, you won’t receive the proceeds when you’re approved. The lender holds the money in a savings account or Certificate of Deposit (CD) that unlocks when the loan is paid in full. 

Here’s what you can expect when you get a credit builder loan: 

  • Step 1: Get approved for an account, sign the loan documents, and pay a one-time administrative fee (if applicable). 
  • Step 1: The lender disperses the loan proceeds into a CD or savings account. 
  • Step 3: You make monthly payments over the loan term. 
  • Step 4: The lender reports payment activity to the three major credit bureaus – Experian, TransUnion, and Equifax. (Be mindful that late payments could have negative consequences for your credit score. The lender may also assess fees). 
  • Step 5: The lender unlocks the funds in the CD or savings account. 
  • Step 6: The lender sends the loan proceeds to you, minus the interest and administrative fees. You can use the funds to boost your savings account, pay off other debt, meet a financial goal, or however else you’d like. 

How to Get an Installment Loan to Just Build Credit

If you’re searching for an installment loan that caters to consumers looking to build credit, consider Self. Self Credit Builder Account stands out amongst the competition as there are no hard credit checks, only an identity verification process and administrative fee, and you could unlock access to a secured credit card without making an additional deposit. 

There are four credit builder plans to choose from:

  • Small Builder: This account comes with an APR of 15.92 percent. You’ll pay $25 per month for 24 months. When the loan term ends, you’ll receive $520. The total cost of the loan is $89. 
  • Medium Builder: This account comes with an APR of 15.97 percent. You’ll pay $35 per month for 24 months. When the loan term ends, you’ll receive $724. The total cost of the loan is $125. 
  • Large Builder: This account comes with an APR of 15.65 percent. You’ll pay $48 per month for 12 months. When the loan term ends, you’ll receive $539. The total cost of the loan is $46. 
  • X-Large Builder: This account comes with an APR of 15.91 percent. You’ll pay $150 per month for 12 months. When the loan term ends, you’ll receive $1,663. The total cost of the loan is $146. 

You may also be able to get a Self Visa Credit Card once you’ve made at least three on-time payments and accumulated at least $100 in savings. Self will allocate a portion of your savings to the card to create a credit line. When you receive your card in the mail, you can use it wherever Visa is accepted. Even better, responsible use over time could result in a credit limit increase, or Self may upgrade you to a partially secured credit card. For full Self credit card eligibility details, visit Self.

Ready to apply for a Self Credit Builder Account? Apply online to receive a quick decision. If approved, a one-time administrative fee of $9 is required to open your account. Self is available in all 50 states and can help you build the positive payment history and credit profile you deserve.

Self

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