Installment Loans For Bad Credit: A Brief Overview
Installment loans allow borrowers to have access to a sum of money up front and pay back the loan in installments over a specified period of time. In order to receive installment loans for bad credit, borrowers typically must provide information such as proof of income and recent pay stubs to lenders, who will then approve the loan amount, the loan term, and the Annual Percentage Rate (APR). While individuals with bad credit may have to pay higher interest rates on installment loans, these financial products can be used to improve credit in the long-term by allowing borrowers to transfer credit card debt and diversifying the types of credit borrowers are using.
So if you have bad credit, it’s especially important to compare different lenders to get the lowest interest rate and reduce your monthly payments this way:
What Exactly is an Installment Loan
Installment loans are financial products that allow individuals to borrow a specific sums of money up front in order to complete a purchase and then pay that money back, with interest, over a specified amount of time. Examples of installment loans include auto loans and student loans. In order to ensure that loans will be paid back, lenders often look at a borrower’s credit score before granting loans. Equifax, Experian, and TransUnion are the three credit bureaus that calculate credit scores. In order to do this, they take into account a borrower’s outstanding debt balances and their payment history and assign them a number between 300 and 850. Higher credit scores (which are achieved through carrying low debt balances, making payments on time, and having a variety of types of credit) show lenders that borrowers are reliable and likely to pay back their loans on time, while lower credit scores may raise red flags for lenders. Specific installment loans for bad credit exist, though, and can help borrowers get their credit scores back on track.
How to Improve you Credit Score Through Installment Loans for Bad Credit
There are several ways that installment loans for bad credit can improve credit score ratings. One fast way to improve credit scores using installment loans is to use an installment loan to pay off credit cards with high utilization rates (i.e. credit cards that have a balance close to the maximum credit limit). This is because credit scores are negatively affected when borrowers use more than 30% of the credit limit on their credit cards. Additionally, installment loans help diversify the mix of credit that borrowers carry, which reflects positively on credit scores. It is important to note that although installment loans for bad credit can improve credit scores in the long-term, they may lead to a small reduction in credit scores in the short-term as new borrowing represents a new risk. However, as long as borrowers make all payments on their installment loans on time, credit scores should rebound within several months.
How to Get Approved for an Installment Loan
The process for approval for an installment loan for bad credit differs depending on the lender. However, typically lenders require documentation such as a government issued ID, proof of income, proof of insurance, and a recent pay stub. This documentation is required so that lenders are able to verify that borrowers will indeed be able to reliably pay back the balance of the installment loan. After receiving this information, lenders then typically approve the loan amount as well as the amount of time the borrower has to pay back the full amount of the loan plus interest and the Annual Percentage Rate (APR). The APR is the total cost of the loan including interest and other fees. Lenders may use factors such as credit score, income, and the ability to provide a co-signor in their calculation of APRs. Because of this, installment loans for bad credit may carry higher APRs than other types of loans. As with all decisions related to loans, it is important that prior to taking out an installment loan for bad credit, borrowers carefully determine how much they will realistically be able to pay back prior to taking out any new loans.
One example of a lending company specializing in installment loans for bad credit is Avant. This lender allows borrowers to take out loans from as low as $2,000 to as high as $35,000 with terms spanning between 24-months to 60-months. APRs range from 9.95% to 35.99%, which is much lower than many other types of installment loans for bad credit.