What It Means
An installment loan is a type of credit where you borrow a fixed amount and repay it in equal monthly payments over a predetermined period. Common examples include auto loans, mortgages, personal loans, and student loans. Each payment includes both principal and interest. Unlike revolving credit (credit cards), installment loans have a defined end date and the balance decreases with each payment. Installment loans contribute to your credit mix, which accounts for 10% of your FICO score. They also build payment history, the most important scoring factor. Interest rates on installment loans are typically lower than credit card rates, making them a more affordable borrowing option for large purchases.
Frequently Asked Questions
Is an installment loan better than a credit card?
They serve different purposes. Installment loans are better for large, planned purchases due to lower interest rates and fixed payments. Credit cards are better for everyday spending and short-term borrowing when paid in full.
Does paying off an installment loan early help your credit?
It can slightly reduce your credit mix and average account age, which may cause a small temporary dip. However, reducing debt is generally positive for your overall financial health.