Instalment loans are those that require you to pay down a sum of money over a period of time. It depends on the amount you borrow and the policy of the lender on how long the repayment length will be. Most of the people think that instalment loans improve credit scores, and that is why they use these loans.
Well, if you want to use these loans only for improving your credit score. It is unwise to use them. However, you can use credit-builder loans. These loans are exclusively aimed at improving your credit rating. The repayment term of these loans is not more than six months. If you pay off on time, you will see an improvement in your credit score.
The improvement does not mean the past damage has been wiped
Although you make payments on time, you need to keep in mind that your score will not be automatically switched from bad to good. The damage of your previous missed payments cannot drop off overnight. A credit-builder loan will help you prove that you managed your payments responsibly. It is not your reckless nature that you borrow money and do not pay off the debt on time.
How instalment loans can help do up your credit score
Instalment loans help make your credit report better because you pay them off over a period of time. It shows that you have been consistent with your payments. This clearly proves that you stick to payments regardless of your financial situation. Therefore, it is crucial that you take out an instalment loan paid off over a more extended period of time. The length of the repayment term should be at least six months.
Some people do not consider this factor and think that monthly instalment loans with no credit check from a direct lender in the UK will also be helpful to improve their credit scores. No credit check means a lender will make a lending decision simply based on your repaying capacity. Since the lending risk is too high, the loan amount will not be big enough. The instalments will be completed in two or three months. This is not enough time for a lender to understand about your financial commitment.
Therefore, if you want to fix your credit file, you should consider a credit-builder loan, not an instalment loan with no credit check.
Another essential thing that instalment loans help with is credit mix. Before you have this one, you might have only a credit card. Even though you never fell behind on the due date, your credit score will not be up to snuff as a result of a lack of a credit mix. A lender wants to see how responsible you are for managing different kinds of debts. Since all types of debts vary, you should try to have a mix of debt to prove that you can manage different types of debts altogether despite the fluctuation in your finances. A borrower with a payday loan, credit card, or personal loan will be addressed less riskily than the borrower with only credit card debt.
Another advantage of having an instalment loan on your credit score is that your credit utilisation ratio will be lower. For instance, if you have maxed out your credit card or if you have used more than 30% of the balance it offers, you can pay it off by taking out an instalment loan. This will lower your credit utilisation ratio. The impact of this will not get in your way of getting a loan at a lower interest rate down the road. However, you will need to clear all your dues on time.
Weekly instalment loans cannot improve your credit score
Instalment loans can help build your credit rating, but you will have to be careful about the repayment term of the loan. There are some lenders that provide small emergency loans like doorstep loans with no credit checks that are paid back in weekly instalments.
These loans carry a very small sum, usually not more than £500. As a lump sum payment can trigger a burden on your pocket, a few lenders will require you to pay down the debt in weekly instalments. You can be tempted to use these loans to improve your credit score, but you should avoid them.
Even if you pay down the debt in instalments on time, it cannot help improve your credit score at all. It does not prove your financial commitment. Further, if doorstep loans are available with no credit check, the record of your timely payments will also not be shown on your credit file. This is because a lender has not run a credit check, which means no inquiries have been made on your credit file.
But if you fail to pay off the debt or fall behind on payments, your defaults will be reported to credit bureaus. It means they cannot contribute to building your credit score, but they can ruin your credit rating in case of a default.
Instalment loans can hurt your credit score too
Do not think that instalment loans and credit-builder loans cannot hurt your credit rating. You will experience negative effects when you fail to manage your debts:
- Missed payments or defaults will be reported to credit bureaus. You will see a drop in your credit points. It can take a lot of time to fix it up. Be wary.
- You may end up taking too much debt. This will increase your debt-to-income ratio. Lenders will consider you a risky borrower if this ratio is too high.
The bottom line
Instalment loans can help improve your credit score, provided they are paid down over a couple of months. Weekly instalment loans cannot. Although these loans increase your credit score, they can also hurt your credit rating.
Anna Johnson has more than 11 years of experience in direct lending industry of the UK. She is the Senior Content Editor at 24cashflow where she is leading a large team of loan experts. During her career, she has helped the loan aspirants to use the particular loans in the best way and improve their financial lives and status.
Anna Johnson is known for her in-depth research of the UK loan marketplace, as she has worked with many major lending firms in her career. During her educational phase, she has done a research on ‘Finance Fundamentals for Growing Business’.