If You Have Bad Credit, Should You Consider an Installment Loan?
Unlike short-term payday loans, the right bad credit installment loan could deliver manageable payments and even boost your credit score!
Your car breaks down. Your kid ends up in the emergency room. All of a sudden you have an unexpected bill sitting on your kitchen table that you have no idea how you’re going to pay. It seems like you’re just going to have to bite the bullet and take out a high-cost payday loan.
Wait. Stop. Take that bullet out from between your teeth. Even if you have bad credit, you still have other options available to you besides a payday loan. And no we’re not talking about a predatory title loan or cash advance—the latter of which is really just a payday loan, anyway.
No, we’re talking about a product that you don’t need to pay off in single, unmanageable payment. Instead of taking out a payday loan, you should consider applying for a bad credit installment loan. While they’re not perfect, they have several advantages over their short-term cousins.
The dangers of payday loans.
There are a ton of ways in which bad credit installment loans are different from payday loans. But what it really comes down is the length of their repayment terms. All the other differences spread outward from there like branches on a tree.
Payday loans are short-term loans, with an average repayment term of only two weeks. They’re often “secured” by a post-dated check or by an agreement that the lender can debit your account once the loan is due. Repayment works like this: On the due date, the entire loan amount (usually a few hundred dollars) plus the interest charge is withdrawn from your checking account.
This might make payday loans sound like a good option. All you have to do is wait until your next paycheck and you’ll be out of debt for good. In fact, that’s how payday loans got their name!
But the reality is something quite different. With an average APR of 391 percent, payday loans are incredibly expensive compared to traditional loans. And that single payment is one that many payday loan customers—over 80 percent, actually—struggle to afford.
When a person can’t afford to pay off their payday loan, they often have to end up rolling the loan over—extending the due date in return for an additional charge—or “reborrowing” a new loan soon after the old loan is paid off.
This is how payday loan borrowers end up stuck in a cycle of debt. They are continually racking up new interest charges and making payments that never actually bring them closer to zeroing out what they owe.
The benefits of bad credit installment loans.
Bad credit installment loans work much the same way that a traditional personal loan does, just with a much higher interest rate. The loan usually has a repayment term of six to 36 months and is paid off in a series of smaller, more manageable payments—often on a monthly or bi-weekly schedule.
Whereas you can oftentimes only a borrow a few hundred dollars with a payday loan (the maximum loan caps are different depending on the laws in your state), you can generally borrow more with an installment loan. You shouldn’t borrow more than you need to, but installment loans are better if the bill you’re trying to pay off is larger than, say, $500.
While you need to make sure you find an installment lender that’s offering lower rates than a payday lender, the fact that their loans are amortizing helps to stave off the predatory debt cycle. With an amortizing loan, every payment you make goes towards both the loan principal and the interest, meaning that every payment you make brings you one step closer to getting out of debt.
The one downside to installment loans is that you can end up paying more interest than you would with a payday loan that you paid off on time. Due to their longer repayment terms, the interest adds up—despite the fact that many installment lenders are offering online loans at lower APRs than your average payday loan.
However, this downside doesn’t mean much when the average payday loan customer is taking out 10 payday loans per year and spending almost 200 days in debt annually. Even if you end up paying slightly more interest, having appropriately-sized payments that you can genuinely afford could be well worth the trade-off.
Here’s one last benefit: Some installment lenders, like OppLoans, report your payment information to the three major credit bureaus—Experian, Equifax, and TransUnion. This means that making your payments on time can help improve your credit score, possibly securing you access to better, cheaper loans in the future.
With payday loans, on the other hand, lenders do not report your payment information, meaning that your payments won’t be included in your score. In fact, the only way that a payday loan can affect your score at all is if you fail to pay one off and it gets sent to a debt collection agency—in which case your score will probably drop even further.
The best loan is … no loan at all.
Not to get all cryptic on you, but it’s true. If you’re looking for the best way to handle an unexpected expense, the best thing you can do is be prepared. Put a portion of every paycheck into savings and build a well-stocked emergency fund that you can dip into when times get tough. That way, you won’t need to take out any bad credit loans at all!
Another great way to avoid no credit check loans is to work on improving your credit score. Easier said than done, right? To learn more about the steps you can take to improve your credit score, check out these related posts and articles from OppLoans:
- What’s the Quickest Way to Fix Bad Credit?
- 5 Tips for Turning Bad Credit into Good Credit
- No Credit Card? Here Are 6 Ways You Can Still Fix Your Credit Score
- Credit Utilization Ratio: What It Is, Why It’s Important, and How to Master It