An installment loan is often an attractive option over credit cards or payday loans. Nonetheless, when you have bad credit it can be very difficult to get one, unless you know how to go about it.
Many people don’t understand what features they should look for in an installment loan or a lender to improve their odds of qualifying. Others do not understand the benefits of an installment loan, so they simply grab whatever loan they can get. Unfortunately, this can mean they pay dearly for their lack of knowledge.
While it may be more difficult to obtain an installment loan with bad credit, it certainly isn’t impossible. Let’s look at how they work, their advantages, and what you should look for in a loan and a lender.
What is an Installment Loan?
Credit cards are the most common form of credit. This is a form of “revolving” credit which has a set limit. You can pay as much as you please (providing you pay at least your the minimum payment).
However, credit cards charge compound interest. If you do not pay off the balance before the end of the grace period, you pay interest on the balance and interest on the interest the next month.
If you use your credit card for cash advances, there’s no grace period at all. You’re charged interest daily. The interest rate on cash advances is usually considerably higher than the normal interest rate too.
Additionally, the interest rate on credit cards is variable. If the prime rate rises, your credit card interest rate goes up too.
An installment loans works differently. The lender sets the interest rate when they approval you for the loan. They give you a lump sum of money and you repay it in equal payments within a set length of time. The interest rate on your loan remains fixed throughout the loan term. Car loans and personal loans are examples of installment loans.
Defining Bad Credit
There really isn’t any such thing as “bad” credit. Equifax, Experian, and TransUnion all refer to the lower end of the credit score scale as poor or very poor. What you may not know is that they all use their own rating systems, and they vary.
As an example, Equifax considers a credit score of between 300 and 579 poor. Experian considers this range very poor. Transunion calls a credit score between 300 and 600 very poor, while between 601 and 660 is poor. As a result, you could be turned down by a lender if they check your credit through a credit agency with a tougher rating system.
However, you can often avoid this situation completely if you choose a lender that doesn’t place a heavy emphasis on credit. Some lenders are most concerned with your ability to repay an installment loan. Consequently, your income is more important.
That’s not to say that these lenders won’t check your credit – they probably will. However, you may not be turned down automatically, since they haven’t set a minimum credit score requirement. They’ll look at many factors before they make a decision.
Advantages of an Installment Loan
Unfortunately, if you have bad credit your only options may seem to be a payday loan or a credit card. However, that’s not necessarily the case. It’s a matter of finding the right installment loan and the right lender.
Nonetheless, you may wonder why you should bother sifting through lenders and financial products to find an installment loan. Is it really worth it? Let’s take a look at some of the advantages so you can judge for yourself.
Quick Cash
Many people resort to credit cards and payday loans since they can provide money quickly. However, the right installment loan can also be very fast.
Some online lenders can have money in your hands within 24-hours. That includes the application process, review, and funds release. The reason they can get through all this so quickly is they use cutting-edge technology.
For instance, progressive lenders often use income verification APIs (application program interfaces). These allow them to verify their applicant’s income in seconds and it eliminates inconvenient document faxing, scanning, or uploads.
Online lenders often use digital contract signing too, so customers never need to visit an office. Electronic signatures are legally-recognized, incredibly fast, and safe.
Electronic funds transfer and bank deposits also get funds into your hands much quicker than mainstream lenders possibly could. Consequently, an installment loan is a good solution for all types of needs, including emergencies, debt consolidation, and more.
Flexible Options
An installment loan through a good lender usually offers a variety of repayment options. For instance, you can often choose your payment frequency, based on when you receive your pay.
Furthermore, you usually have much longer to repay. Payday loans must be repaid within weeks, whereas an installment loan could offer you a year, even if you have bad credit. That’s a lot more time to get your finances in order.
Easy to Budget
Since an installment loan offers fixed payments, it is easy to manage your monthly expenses. Add the amount to your budget and never worry about payment increases.
Pay Extra at Any Time
A good installment loan is “open”. Basically, this means you can pay extra at any time, without penalty. When you pay more than your scheduled payments, you pay less interest. Of course, when you pay off a loan early, it also looks good on your credit report.
Builds Credit
Your payment history represents 35% of your FICO Score. If you have less than pristine credit, your timely payments throughout your loan term can play an important role in improving your credit.
Generally, payday loans are not reported to the three credit bureaus. Consequently, you can’t improve your credit score even when you pay off your loan in-full and on time.
Increases Credit Mix
If you’ve only ever used credit cards, you have a limited credit mix. Credit mix refers to the types of credit accounts you have.
Your credit mix accounts for 10% of your FICO score. Adding diversity can positively impact it, since it shows creditors you can use various forms of credit well.
How to Find a Good Installment Loan
Without a doubt, the number one consideration for those with poor credit is “how” they apply for an installment loan. In-person and online lenders offer them, but they may not use the same review process.
Pre-Approval Vital
Lenders choose whether they use a traditional method or a pre-approval method when you apply for a loan. The traditional method utilizes a “hard” credit inquiry which can lower your credit score by as much as 12-points.
Conversely, pre-approval involves a “soft” credit inquiry which does not affect your credit score. It simply gives the lender a general overview of your financial position. The lender then verifies your income, identity, and other information so they can decide whether you qualify for a loan. If pre-approved, you see their terms, including the interest rate, payments, etc.
Pre-approval is offered without obligation. Consequently, you could apply through dozens of lenders if you would like, providing they use the pre-approval process. If one turns you down, there’s absolutely no reason you can’t try others.
No Minimum Credit Score Requirement
As mentioned, some lenders do not set a minimum credit score requirement. For those with poor credit, this is a must.
If the lender mentions a particular minimum score, you’ve just lowered your odds of obtaining an installment loan. Instead, look for lenders that state “all credit score welcome”. You’re more likely to be approved, even if you have poor credit.
No Fees or Penalties
Unfortunately, some lenders take advantage of those with poor credit. They may charge an “origination” fee just for setting up your account, which can cost you between 1.0 – 9.99% of your loan amount. That’s a lot of money to pay for something that is actually the lender’s administrative expense.
Another common fee can come into play if you ever want to more than your scheduled payments on your loan. Instead of appreciating that you’re handling your debt well, they charge you for the interest they lose when you pay early. It’s called a pre-payment penalty and it can apply to extra payments, lump sum payments, and payment in-full.
Fortunately, you do not need to pay either of these fees when you choose the right lender and loan. A good installment loan is “open” meaning you can pay more than scheduled payments at any time, without penalty.
Transparent Qualification Requirements
It always the search process if you know whether you meet basic installment loan requirements through a particular lender.
You can expect the lender will ask for information such as your name, address, email, and phone number. They will probably want your Social Security Number or Individual Taxpayer Identification Number too, to verify your identity. However, this is where the commonality often ends.
As discussed earlier, some lender use digital income verification so they will want information of your active bank account with a US financial institution. They may also want to see several months of transactions so they can confirm your income through your direct deposits.
The lender should also tell you when they can’t help you. For instance, most lenders won’t consider your application if you’re currently enrolled in an active bankruptcy, consumer proposal, or credit counselling program.
If a particular lender doesn’t provide this information, it is best to look elsewhere. Otherwise, you could be wasting your time when you’re already facing a credit challenge.
Bottomline on Bad Credit Installment Loan
Lender requirements differ and credit isn’t always the deciding factor. It is possible to obtain an installment loan, even if you have poor credit.
FlexMoney offers open online installment loans of between $200 and $2,000, with 12-months to repay. We use a pre-approval process, digital income verification, and do not charge extra fees.
If you would like more information on our company, please visit our website. We also offer more in-depth information on why installment loans are your best choice here.