Why Installment Loans are Designed for People with Bad Credit
You might ask how installment loans for people with bad credit could possibly be a good option, and with valid reason.
Loans are a little scary. “The Crippling Debt that Time Forgot,” would probably be one of the easiest horror film titles to identify with for millions of the people around us, and yet it’s undeniable that loans have become a necessary part of life for most major life purchases.
A home, a car, a business startup, or an education are all legitimate reasons to need to go into some level of debt, but if you already have bad credit, that prospect can be terrifying.
What Was it Like for Me?
That’s how it was in my family growing up. My parents had already accumulated a great deal of debt from financial difficulties in the past, and had filed for bankruptcy twice, but they still dreamed of owning a home.
How did they manage to achieve their goal? Through making a careful plan to cover all loan expenses every month before actually going into debt to buy a home, they were able to turn their long-term installment loan from something unpleasant to think about into something that was (usually) unworrisome.
With that goal in mind, we should probably talk about why you can actually plan things out to make it so that installment loans for people with bad credit become a part of your reality.
While it might seem that exactly the opposite is true, with some specific planning and self-discipline, an installment loan for people with bad credit can actually help you get prepared to handle other, more important loans in the future.
What we’ll investigate today are three primary ways that for people with bad credit, installment loans can actually be a useful credit tool for recovering a good reputation with lenders and banks.
While you’ll always want to be cautious regarding when and why you go into debt, installment loans are a relatively stable way to prepare for the moments when debt is unavoidable, such as purchasing the first family home.
1. You Can Plan Carefully to Make Payments
Installment loans are one of the most common types of loans today, and they’re used for everything I mentioned earlier: Houses, vehicles, businesses, school, and any other large, necessary purchase that it would be impossible to pay for all at once (unless you have $200,000 sitting in a savings account).
That fact is one of the reasons this first step is easy; you’re probably not buying any of these things on the spur of the moment.
Before you buy a house or a car, you’re likely going to plan for how you’re going to get the loan, and you’ll research what features of the car you want to make sure you get the right fit for you or your family.
This first step just takes things a little farther. The first way to deal with an installment loan for people with bad credit is to plan for a certain level of monthly payments that you can still see yourself making five years down the road.
Due to this one simple aspect of their nature, installment loans are designed for people with bad credit to be able to recover their credit score gradually by making stable payments over time. This tends to demonstrate to future lenders that you were consistent and trustworthy in dealing with your installment loan; for people with bad credit, this can actually change a lender’s perspective of you.
If you’re looking at your budget before getting an installment loan, check your monthly income, and even if your interest ends up being higher due to smaller payments over a longer period, it may be worth the added total expense just to be sure you can completely make all the payments on time every month.
Don’t Miss a Payment
Missing a payment is likely far worse for your credit history than paying a total of a few hundred dollars more over the course of a few years.
One important thing to consider when making your financial plan is that it might not actually be beneficial for you to try to pay off the loan early. All concerns about early payment penalties aside, it’s just not as useful to you in the long run to try to get the loan paid off sooner than you had originally planned.
If that doesn’t make sense, don’t worry. It was surprising to me when I found out, too, but this is one of the reasons that installment loans for people with bad credit can turn into a positive.
One of the reasons why has to do with how your credit score is calculated. Having an active installment loan that is free of delinquency (missed or incomplete payments) is actually a greater positive influence on your credit score than having no loans currently active, often accounting for about 35% of the score.
Paying Off the Loan
That means that being in the process of paying off an installment loan, and doing so successfully, actually makes you more appealing to future lenders than not being in any debt at all.
Essentially, this means that while it’s necessary for you to be in debt, you might as well milk the positive aspect of paying off a loan for all it’s worth. Use every steady monthly payment to improve your score bit by bit rather than cutting off that benefit early, at least if you plan on getting loans for other purchases in the future. This is one key way that installment loans for people with bad credit can be used to your advantage.
The other reason for not paying off a loan early is because, if you’ve planned effectively and you’ve kept your previous level of pay, you already know you can pay off the loan over time. That extra money you wanted to use to pay off the loan early could be more effectively saved in an emergency fund or put toward a future major purchase.
Installment Loan Help
That way, if it does turn out that you need the money to help with your installment loan later on, it’s still there, but if you end up needing it for something else, you haven’t already committed it to the loan.
This is still a part of planning for your improved credit, because while your current loan might already be handled, any extra money you save can go toward your next downpayment.
Let’s recap before moving on. Planning is the first way installment loans for people with bad credit can actually be a positive, and you make it work that way through:
- Making a specific payment plan to fit your consistent income
- Being disciplined in sticking to your plan
- Avoiding the temptation to pay off the loan early
- Saving extra money in a rainy-day fund for future expenses
2. Multiple Installment Loans Add Diversity to Your Credit Score
The next way that installment loans help people with bad credit is through diversity. As Kevin Haney from savvyoncredit.com said it, “You might feel more confident when loaning money to a friend if you could observe his behavior at work, with family, with friends, and while at church instead of just one venue. The most frequently used algorithms [for calculating your credit score] operate in the same fashion.”
That’s how lenders see it when you have multiple types of installment loans active at the same time. To be honest, it’s not an uncommon situation. Student loans, auto loans, and a mortgage aren’t unlikely bedfellows, so by dealing with these kinds of loans simultaneously, you make your installment loans work to improve your credit score even more.
That is, if you manage them well. Multiple loans can be tricky to handle, so you might not want to capitalize on the diversity of your loans if you know your stable sources of income aren’t sure to cover it.
There are still ways to diversify your credit portfolio without taking on numerous large-scale loans all at once, though.
One simple method is to start out with one credit card that you actually end up using more like a debit card. This is where self-discipline comes into play again. You have to force yourself not to use the credit card for more than you have in the bank, and by paying it off completely every month, you’re starting off on the right foot.
First Big Loan
Then comes your first major installment loan. It might be a student loan, or if you’re out of college you might have an auto loan on top of that student loan. If this is stretching you too thin, it’s probably obvious that you can leave buying a house for later.
Diversifying your credit is more of a long-term benefit of installment loans for people with bad credit and good credit alike.
If all you’re working with is a credit card and a car payment, don’t worry about it. The combination of revolving credit (credit with no specific payment plan) on your card, and installment-based payments on your car loan will be a good starting point to make future installment loans a possibility for you.
Once again, let’s review:
- Try paying off loans of multiple types to increase your credit score
- Only take on as many loans as your station in life allows
- Diversifying your credit portfolio is a long-term benefit, not an immediate one
3. Installment Loans Help with Organizing Excess Debt
One reason for your bad credit could be the state of your revolving credit, especially if you have multiple credit cards that are unpaid or maxed out. Installment loans play into this by providing a way to combine the multiple accounts you’re dealing with and form a payment plan for them with a title loan calculator.
This method can be a little tricky, because in order for it to work to improve your credit score, you need to make sure you don’t incur additional charges on your credit cards or other revolving credit that you’ve combined together into the installment plan.
What Happened to My Parents?
You remember when I talked about my parents making a plan to get out of debt and improve their credit to buy a house?
This was what they did. Turning their multiple maxed-out credit cards into one large installment loan made a disorganized mess into one manageable plan that they’re still successfully working on today.