Installment loans are best for bad credits
Sometimes life puts us in a tough position and with few wrong decisions and bad luck our credit scores can be affected in negative way. There are multiple ways to calculate credit scores but, financial institutes most favorite technique to calculate credit score is FICO. The FICO score range starts from 300 and it tops at 850, which is a best score anybody can get.
When in need of urgent cash, it becomes difficult to get funds from big financial institutes via traditional ways if the credit scores are at the lower end of FICO score. At such situation options available are Installment loans, which are provided by multiple financial institutes or another option is payday loan, which can be borrowed by any lenders.
To understand how installment loans are best and better than payday loans, we need to understand terminologies like bad credit, installment loans and payday loans.
What is Bad Credit?
Bad credit is an indicator of poor credit records and is depicted by lower FICO scores. When your credit scores are low, you are considered as a risky borrower. With such considerations it becomes difficult to get loans and funding and, also you do not have most of the privileges which a person with good credit score has. With poor scores you miss on privileges like lowered interest rates, priority funding/loans, more favorable terms and most importantly lower chances of denial.
Impact of bad credit score is not just limited to loans and funding or credit card approvals. With poor credit scores you will also find it difficult to get,
- Cell phone contracts
- Student loans
- Affordable car insurance
Poor credit score can impact your chances of getting hired, it is observed that employer tend to check credit histories of the applicant. Employers use credit histories to get sense of dependability.
What are Installment loans?
Installment loans are loans borrowed at once and the debt is repaid with small fixed payments which are paid at set schedule decided at the time of borrowing. Installment loans has fixed interest rate which is paid with the fixed payment.
Installment loans are prominently offered by banks and other credit unions and organizations. Most common types of installment loans provided by these lenders are personal loans, car loans, and mortgages. Car loans and mortgages are used to finance specific purchases whereas personal loans can be used for different purposes.
One can use personal loan for building credit score, repay some debts, or to fund every day or personal expenses. Personal loans are easier to get even if the credit score is low as it is possible to give this type of loan without any security or collateral.
What is a Payday Loan?
A payday loan is a small amount loan which is given a for a very short term. This type of loan is usually paid back in single lumpsum payment by the borrower’s next paycheck.
Payday loan is also called as:
- Cash advance
- Short-term loan
- Payday advance loan
- Fast cash or fast loan
- Bad credit loan
- Deferred deposit transaction
- Paycheck advance
These types of loans are usually targeted towards poor people or people with no credit score and history, or people who are financially illiterate and in need of urgent cash. But, for people with poor credit score, this is their first option when in need of some cash.
One can get payday loan within a day or so and has very few requirements when compared with other loans. More importantly these lenders do not check credit score or credit history and the loan is unsecured.
The flip side of payday loan is that the interest charged by lenders for such lending is exorbitantly high. An average payday loan can have interest rate as high as 400%, if you are not able to pay this loan then you put yourself into risk of incurring many different fees and fines, and eventually put you into a vicious debt trap.
Although these loans do not require any collateral or security but, the lender will take a post-dated check from you which your lender will cash on the date mentioned on the check. So, you must see to that you have enough balance in your account to cover the amount on the check or else you may get into legal trouble.
Installment loans for bad credits
For a consumer with a bad credit score borrowing money via installment loans from reputed financial institutes like banks and credit unions is not that difficult as presumed. Financial institutes can give loans to person with bad credit score after scrutinizing the credit history.
To understand your chances of getting an installment loan you should know how FICO credit score is calculated. Check below to know on which factors credit score is calculated and how much weightage each factor has,
- Payment History – 35%: Your past payment history carries the most weight towards your credit score. In past payment history it is checked whether you have paid past credit dues and how timely are you paying your other dues and bills. This help lenders assess risk while lending you money. Late payments, defaults, bankruptcy and repossessions can affect this score.
- Amounts Owed – 30%: Owing money on your credit accounts may imply towards low FICO score but it does not account you as a borrower who possess high risk. However, if your credit usage is too high from the available credit, then it is indication that you are thinly stretched. This can give an impression of you someone who is likely to default.
- Length of Credit History – 15%: Long credit history will account towards better FICO scores so, it does not mean that people who have not been using credits for long period will not have good FICO scores, other factors also plays role and if rest of these factors are good then your FICO score will be good. FICO scores will look for age of all of your accounts and how period of usage of each account.
- Credit Mix – 10%: Your other financial interactions like credit cards, retail accounts, loans, mortgages, etc. are also considered while calculating. But, it is not necessary for you to have all of these. A mix of different credits usage shows that you are a responsible borrower and possess less risk.
- New Credit – 10%: Opening numerous credit accounts within a short amount of time represents a great risk and it is not good to open multiple credit accounts if your credit history is not old. It is observed that having numerous credits at a short time affects FICO scores.
If you are someone who has bad credit score but were well within the FICO guidelines then your chances of getting loan is good. Moreover, installment loans are not strict with the FICO score and they will review your loan file as per their policies too.
Banks and other finance unions just want to make sure that the money they are lending is not at risk and there is assuring that will get their money back. If you are able to show that then it likely that you will secure a loan.
How installment loans are best for bad credit?
As you have understood what bad credit, installment loans and payday loans are, you must have also understood the basic working of installment loans. What makes installment loans best choice is that you do not have to pay all of the amount with interest at a time, instead you pay the money at small fixed intervals.
Another advantage of taking installment loans is you are borrowing from credible sources and it can also help improve your credit scores.
The interest rates charged for installment rates are low, you may see that you are not getting privileges like other borrowers with scores and you are paying higher interest rates but, if you compare the interest rates with payday loans you will realize that you are paying less. As mentioned in earlier section payday loans can have interest rate averaging at 400%.
When comparing with the alternative, payday loans, installment loans outshine in every aspect as it is less burdening on borrower, provides better interest rates and it can also be refinanced and, financial institute may also help with some exit option. Whereas, with payday loans repayment can become a burden as the money borrowed has to be paid with interest in lumpsum, interest rates are too high and eventually it can become a debt trap.
The only advantage a payday loans has over installment loans is that the loans are approved fast and does not require any hefty paper work.
If you are looking for some finance and way to improve credit score, consider personal installment loans. They are safe and less risky way to improve credit.
You should also consider secured credit cards as another option to build your credit. For these types of cards, you will have to pay some upfront cash as security deposit which can be in few hundred dollars. These deposit requirements can help you get a secured credit card without consideration about your credit scores.
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