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.
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.
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.
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:
|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.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
SoFi: Fixed rates from 3.890% APR to 8.074% APR (with AutoPay). Variable rates from 2.550% APR to 7.115% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.550% APR assumes current 1 month LIBOR rate of 2.50% plus 0.04% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.