Borrowing is a huge part of the US economy with many people borrowing for various reasons. The most common loan type is a home mortgage, but people finance small purchases on their credit cards as well. There aren’t many purchases in the United States that don’t often happen on some sort of credit terms. The two most common types of credit are installment credit loans, and revolving credit loans. These are both loans but function very differently from one another.
What is Installment Credit?
Installment credit is what most people consider to be a typical loan. You borrow a fixed dollar amount on the condition that you will pay it back at regular intervals. Once the set loan term is finished and all the payments have been made, the installment credit would be paid off in full.
The most common installment credit in the United States is home mortgages, student loans, auto loans, and small business loans. Installment loans can take place over months, or more often many years. They typically involve either a fixed or variable interest rate, and will positively affect credit score if paid off on time.
How to Get an Installment Loan
Installment loans are typically offered to borrowers based on a few criteria.
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Credit
Credit score plays a huge role in applying for and receiving an installment loan. The creditor wants to know how likely you are to repay the loan back based on previous borrowing history. Making sure you build up a great credit score is crucial if you plan on applying for any type of installment credit. The credit score required to receive an installment credit would vary by each lender, but typically you would need to have a credit score above 670.
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Collateral
Most installment credit loans have some sort of collateral to protect the bank from a non-paying borrower. Collateral is a pledge of security for repayment of the loan. In most cases, the item you are trying to finance is what gets used as collateral. So if you are buying a house, the home would be the collateral. Need an auto loan? Expect that the car would be repossessed and the bank would take ownership of it for non-payment. Student loans typically do not have collateral, which is why the banks are protected from student loan borrowers from declaring bankruptcy.
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Debt-To-Income Ratio
Your debt to income ratio is crucial to receive an installment loan. Your debt-to-income ratio is the percentage of your monthly income that goes to pay your existing debt. If too much of your existing income is already being used to pay other loans, a creditor may feel that you cannot reasonably be expected to make payments on the new loan they offer.
Where would I apply for an Installment Credit?
If you are looking to apply for an installment credit, you would want to first consider what is being purchased or what the loan is needed for.
Applying For Federal Student Loans
For student loans, you should first start out by completing a Free Application For Student Aid(FAFSA). This is a government form to apply to the US Department of Education for federal student aid. The amount each person can borrow in Federal Student Loans is limited to the following:
| Subsidized(dependant) | Unsubidized(dependant) | Subsidized(independant) | Unsubidized(independant) | |
|---|---|---|---|---|
| First Year | $3,500 | $5,500 | $3,500 | $9,500 |
| Second Year | $4,500 | $6,500 | $4,500 | $10,500 |
| Third Year & Beyond | $5,500 | $7,500 | $5,500 | $12,500 |
| Graduate & Professional | None | $20,500 | None | $20,500 |
| Sub & Unsub Aggregate Limits Undergrad | $23,000 | $31,000 (includes both sub and unsub) | $23,000 | $57,500(includes both sub and unsub) |
To apply electronically for federal student aid using the FAFSA, follow this link.
Applying For Private Student Loans
Some students are not eligible for federal student loans, so they turn to private student loans as a way to finance their education. There are a number of private student loan lenders who offer competitive rates and terms. Here is our recommended list:
- LendKey – Loans from community-based lenders that offer great rates and prioritize people over profits
- SoFi – Competetive rates with professional career and salary guidance
- CommonBond – They boast $24,046 in average savings for their student loan borrowers
Applying For an Installment Credit Home Loan
If you are looking to apply for a home loan you will have many options. Just about every bank in the US wants to help you finance the purchase of a home or refinance an existing home. Home mortgages account for the largest personal debt in the United States and banks are competing to capture their share of the market. To get started, you should first look locally. Small local banks and credit unions often have the most competitive rates for home loans. They know the market in which they provide financing very well, even better than the large national companies. You would have a more personal relationship than what you would find with a large national bank.
If your local market for financing is limited, then you can always turn to the big boys for financing. According to Bankrate as of 2015, the largest mortgage lenders in the United States are:
- Wells Fargo – 12.7%
- Chase – 6.3%
- Quicken Loans – 4.7%
- U.S Bancorp – 4.2%
- Bank of America – 4.2%
- PennyMac Mortgage Investment Trust – 2.9%
- PHH Corp 2.4%
- CitiGroup – 1.8%
Payments In An Installment Credit
Payments on an installment credit loan are typically fixed (unless you have a variable interest rate). The loan usually starts out with the borrowers payment going more towards interest than principal, and as the loan term progresses more and more of the payment will be applied to the principal balance of the loan. This is called an amortization schedule. It’s important to note that interest not paid on an installment loan will capitalize and will cause your loan balance to grow.
How Installment Credit Will Affect Your Credit Score
FICO score is what 90% of all financial institutions use today to determine creditworthiness. Installment credit can be a great way to increase your FICO score if you are making on-time payments. Your FICO score is determined by the following:
- Payment History 35%
- Amounts owed 30%
- Length of Credit History 15%
- Types of Credit Used 10%
- New Credit 10%
With the above list in mind, having an installment credit loan can be a great way to build up credit. The important thing is to remember that borrowing the money isn’t what improves your credit score, its making regular on-time payments on that loan. So while borrowing money can help a good borrower increase their credit score, it can also lead to a bad borrower destroy their credit. If your goal is to improve your credit score, we have some tips for you.
