Small installment loans


Before seeking to boost your FICO score by carrying different types of credit, do this first: Make sure you actually need it.

Your FICO score depends on several factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and types of credit used (10%). Installment loans are a popular form of alternative credit, and because they can help boost a FICO score, you may wonder if it’s a good idea to take out such a loan to boost that score.

The general rule is this: Don’t take out a loan just for that purpose. However, there are other factors to consider, so let’s tackle them one at a time.

Do you actually need the loan?

Unless a loan carries 0% interest and you are 100% certain you can pay it back, you should only draw down credit when you really need to. The 0% scenario can be a great way to stem a cash flow drain while waiting for a definitive source of cash to come through, such as a new job or inheritance.

Otherwise, you should generally not get an installment loan simply to improve your credit score. For starters, it will cost you in interest payments and other fees. Second, it isn’t likely to raise your score much.

However, if you actually need the loan, then go for it. If it’s an installment loan for a new or used car, so much the better. Taking out the loan not only helps with the types of credit used, it’ll also count as new credit, and paying it on time will be a huge boost to the payment history criterion.

Is it cheaper than other debt you carry?

There are such things as debt consolidation loans. These installment products generally have higher limits, longer terms and lower rates than many credit cards. If you can take out an installment loan and use the proceeds to pay down or pay off credit cards, it’s worth considering. Many installment loans might be in the 8-10% range, while credit cards can run as high as 24.99%.

In this case, an installment loan makes great sense and it will boost your score.

What if you have cash?

Suppose you want to buy a used car for $15, 000 and you actually have the cash to pay for it? An installment loan may make sense in this case. Let’s say you can get a $10, 000 installment loan at 4%. That is very cheap capital, and it will free up $10, 000 of your cash hoard.

If having that cash free helps your overall cash flow situation, and you know you can make good on all your payments, the $400 or so in interest you pay each year may be worth it to you. There can be personal psychological value in knowing you have 10 grand sitting around, perhaps for use in an emergency.

Or perhaps you know of a rewards credit card that pays you 5% cash back on purchases. Well, if you are going to spend that $10, 000 on purchases anyway, you’ll earn back $500 from spending that money. You’ve managed to arbitrage a 4% car loan into a 5% return.

One exception

There may be one exception to this rule. If you are on the edge of a FICO score threshold, and you know you can take out a small installment loan at a low interest rate that you can pay back relatively quickly, then it may be worth it. The 640 score happens to be where certain mortgage decisions get made. If you’re at 635, then an installment loan properly handled may result in massive savings on a very large future loan.

Interesting facts

  • Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Examples of revolving credits used by consumers include credit cards. Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day operations. They were first introduced by the...

Additional information

Personal Consumer Installment Loan Story
Personal Consumer Installment Loan Story
Annual Percentage Rate & Traditional Installment Loans (TIL)
Annual Percentage Rate & Traditional Installment Loans (TIL)
How to Recognize a Good Loan | Traditional Installment
How to Recognize a Good Loan | Traditional Installment ...
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