When you take out a loan, it is bound to impact your credit report. But whether this impact is positive or negative depends on how responsibly you use this credit. If you’re time-bound and make repayments in full, an instalment loan could boost your credit score. Whereas, missing repayments will harm your credit score. Defaults can stay on your credit report for a long time, hampering your chances of securing credit in the future.
It is important to check your credit report before applying for an instalment loan. Errors and discrepancies in credit reports are common, but if they go unchecked, they can lower your credit score. Even lenders can make erroneous entries, or forget to record your repayment. Therefore, it is imperative that you regularly examine your credit report.
In this article, we’ll learn more about installment loans and for how long they stay on your credit report.
What is an instalment loan?
An instalment loan is a form of short-term credit that you can repay over fixed monthly instalments. Instalment loans can come in handy when you’re planning a big-ticket purchase. Rather than exhausting a large chunk of savings, you can spread the cost across a period. Paying over fixed monthly instalments can take off a lot of pressure from your shoulders.
A lender’s decision majorly relies on your income, credit score, debt-to-income ratio and employment history. Your credit score helps the lender assess your creditworthiness and your income and employment history account for your affordability. If you apply for an instalment loan with a decent credit and employment history, you may borrow up to £35000.
How does an instalment loan work?
The idea of an instalment loan is to help the borrower pay conveniently, over fixed monthly instalments. Start by filling an online loan application form, with personal details such as your address, employment status, income, expenses, loan purpose, and loan term.
Once you apply, lenders will assess your loan application and inform you of their decision. Your creditworthiness will be reviewed to determine how much money you’ll be lent and at what terms.
Now, when your instalment loan application gets approved, you’ll receive a loan agreement from the lender. Go through the agreement carefully before signing it. It is important to read the fine print to fully grasp the contract. Once you’ve submitted the signed agreement, the lender will transfer the funds your bank account.
You are free to choose the tenure of your loan. A longer-term can reduce your monthly instalments. But remember that you’ll be charged interest each month until the loan is paid off. So, if you opt for a longer-term, you may end up paying more in interest.
If you’re taking out an instalment loan to improve your credit score, ensure that you pay the instalments in full and on time. The loan will do more harm than good if you don’t repay it responsibly. Not only will it deteriorate your credit score, but also hinder your chances of approval for credit in the future.
What are some examples of instalment loans?
Instalment loans can be categorized in to secured and unsecured loans. To get a secured instalment loan, you’ll have to use an asset as collateral, such as your car or property. If you default, the lender will recuperate their loss by repossessing your asset. An unsecured loan, on the contrary, doesn’t require any collateral security. However, you need a decent credit history to qualify for an unsecured loan.
Here are some examples of an instalment loan:
- Personal loans: These are instalment loans that you can repay over time in fixed or variable monthly payments. People often find unsecured personal loans with fixed interest rates easy to manage. You can finance almost anything with a personal loan. Most people use personal loans to fund their wedding or their home improvement project.
- Mortgage: A mortgage is a secured loan taken to purchase a property. Now, you pay off the mortgage over fixed monthly instalments. If you fail to repay your monthly mortgage payments, the lender will seize and repossess your property. They may sell it off to recoup the loss.
How long does an instalment loan stay on your credit report?
An instalment loan can stay on your credit report for a while. But it largely depends upon your repayment history.
- If you’ve repaid the instalment loan in full: If you took an instalment loan in the past and paid it off, the account will stay on our credit report for up to 10 years from the date of last activity.
- If you have an ongoing instalment loan and have missed payment dates: Late repayments usually stay on your report for up to 7 years.
- If you have an overdue instalment loan: If you’ve not paid off an instalment loan, then your ‘not paid’ account will remain on the report for up to 7 years.
- If your instalment loan went to a collection agency: The instalment accounts that go to collection agencies generally stay on your credit report for up to 7 years from the date the loan became past due.
Can an instalment loan help you build credit?
Taking out an instalment loan can give your credit score a boost. All transactions get recorded on your credit profile. So each repayment or default impacts your credit score positively and negatively, respectively. Lenders usually update credit bureaus every time you make a repayment. The credit bureaus update your credit profile according to the information they receive from the lender. So how you repay your loan determines the impact on your credit profile.
Instalment loans also allow you to benefit from the “credit mix”. You can improve your credit score by using a variety of financial products. A mix of products like an instalment loan and a credit card can surely enhance your credit rating.