When Is a Bad Credit Installment Loan Right for You?
You might think having bad credit means you won’t be able to get an installment loan, but that’s simply not true. Many lenders will work with individuals who have bad credit to get them the loans they need and help rebuild their credit.
An installment loan is any type of loan where a lender gives a fixed dollar amount to a borrower, who then repays the loan with set, scheduled payments over a predetermined amount of time. The borrower pays back the loan amount plus accrued interest, which can be at a fixed or variable interest rate. Car loans and mortgages are examples of installment loans, and they are typically repaid on a monthly basis.
A bad credit installment loan may be right for you if your credit score is too low to obtain a traditional loan and you need to make a purchase or consolidate debt. However, be aware that there are risks that come along with bad credit loans, such as higher rates, more strict terms and a negative impact to your credit score if you fail to make your payments.
Can you get an installment loan with bad credit?
Most personal loan lenders in the LendingTree network require a credit score of at least 500, but rates will likely be higher for people with poor credit. For example, rates start at 3.99% in our marketplace but can go as high as 35.99%.
In the larger world of installment loans, there are some lenders that can carry rates well into the triple digits when the borrower has poor credit. Approach these types of loans very carefully, and be sure you know what you could be getting yourself into. You could easily find yourself trapped in an endless debt cycle.
Some lenders may not work with borrowers who have poor credit at all without securing some kind of collateral. Collateral can be a piece of your personal property, such as car title (auto title loan) or even your home (home equity loan). The risk with these types of loans is if you fail to pay back the loan, the lender can take the collateral.
To improve your odds of getting approved for a bad credit installment loan, consider asking someone to be your cosigner who has a good credit history. A cosigner will share the responsibility for payments and be on the hook in case you aren’t able to make payments on time. That means their credit score could take a hit but also that the lender can pursue the cosigner for payments.
It’s a serious request to ask of a friend or family member, so be sure you both understand the risks involved before moving forward with a cosigner.
3 ways an installment loan can help build credit
When you have poor credit, using an installment loan wisely can be a strategic way to rebuild what you’ve lost.
Here are three ways you can use an installment loan to boost your credit score:
- Make your payments on time every month. Payment history is a huge component of your credit score, so making on-time payments will likely help you rebuild a poor score. The key is making those payments on time. If you miss payments, you could just drag down your score further.
- Consolidate revolving debt with an installment loan to lower your utilization rate. Credit scoring models put a lot of weight on the ratio of debt you carry on revolving credit lines (e.g., credit cards) versus how much credit you have access to. When you use a personal loan to consolidate credit card debt, you automatically lower your utilization rate, which can boost your score.
- Boost your credit mix. Credit scoring models like to see a mix of types of debt, including both revolving debts (credit cards) and installment loans (personal loans, mortgages, auto loans). If you only have revolving debts, adding a personal loan to the mix could help your score.
Where to find an installment loan
When you have poor credit, the last thing you want to do is go to the first payday lender down the street or that you find online. Although these are types of installment loans, they often carry the highest rates and can be incredibly risky for borrowers.
A better place to start reviewing your options is a local credit union, which may be more willing to work with people trying to rebuild their credit. In more good news, most credit union loans have a maximum interest rate of 18%.
Once you’ve researched what your local credit union has to offer, keep searching and compare your options. You can also compare rates online at LendingTree to help find an option that works best for you.
The easiest options aren’t always the best
In your search for a loan, you may come across loan companies that advertise payday loans. Payday loans are small loans, usually for $500 or less, that typically require you to pay back the amount you borrowed with your next paycheck.
While they may seem like a convenient way to get money fast, payday loans are usually loaded with hidden fees, high interest rates and other drawbacks. Loans like these typically have an annual percentage rate of 390% or higher. Some states even prohibit payday loans.
Unfortunately, restrictions on payday loans have led some lenders to offer similar loans by a different name, often called short-term personal loans or short-term installment loans. These types of loans are usually for relatively small amounts and come with very high interest rates.
Avoid looking for a “fast” way out when it comes to loans, and instead, look for a reputable loan provider for your borrowing needs. If a loan offer sounds too good to be true, it could be a scam that will ultimately cost you even more money.
How to avoid damaging your credit score with an installment loan
While taking out an installment loan could help your credit if you do it correctly, taking the wrong steps can negatively impact your credit score.
To avoid hurting your score, consider the following steps:
- Check your credit score. You can check and monitor your credit score for free through LendingTree to help you be aware of any potential issues with your credit and stay abreast of your score as you continue to build it up.
- Pay down existing debt. Although consolidating debt can be helpful in some cases, paying off debt is one of the most important things you can do to increase your chances of improving your credit score.
- Avoid opening up accounts you don’t need. Some people mistakenly think that opening up new credit cards can help increase their credit score. But in most cases, opening accounts you don’t need won’t help your score.
- Always make your loan payments on time. Even missing a payment by a few days can hurt your credit score.
- Use a credit repair service. Because there are so many credit repair scams, consider using LendingTree’s credit repair services online tool to help you find a company you can trust.
- Build up your savings after paying down existing debt. After you’ve taken steps to reduce your debt and repair your credit score, focus on building your savings so you can have more financial freedom, especially when choosing future loans.
The bottom line
If you’re looking for a loan and you have bad credit, there are options for you. It is possible to get a loan from a reputable lender. And in many cases, getting a loan, even with bad credit, can help you by building up your credit score, consolidating debt and lowering monthly interest.
To get the most from your installment loan, work on ways to improve your credit score, such as paying down debt and making payments on time. Be sure to work with a reputable lender to choose a personal loan that works for you.