In times of need, installment loans may look attractive. They can be taken out in larger amounts than payday loans and paid over long periods of time. If you're not paying attention, however, you can wreck your credit, or end up paying much more than you should.
It's important to be on time with your installment loan payments and to make every payment. Not only can you rack up extra fees from your lender, you can also hurt your credit. These types of financial institutions often regularly report to credit agencies, so anytime you miss a payment or make a late payment, it may ding your score. This, in turn, will influence your ability to get loans and what kind of interest rates you'll get in the future.
Automate Bill Paying
One big advantage of how finances work today is that you can set up your bills on auto-pay. That means the amount is automatically taken out of your account when it's due. Auto-pay works well for people who may be forgetful in paying their bills. You can do it either through your bank or through the company you owe. Make sure you write your payment date down so you know what day the money is coming out of your account each month.
Paying Off Early
If you've come into some money, you may think it makes sense to pay off the remainder of your installment with one big lump sum. However, your lender may charge an early payment penalty to compensate for the money it no longer gets from you in interest. Early payment can also have a negative impact on your credit score because it reduces the amount of available credit you have versus what you're using. If good credit isn't your concern, go ahead and make that payment. It could save you lots of money in the long run, especially if you're paying a high interest rate. However, if you're worried about your credit, you need to weigh the benefits and costs carefully.
Which Debt First?
Of course you want to pay off your installment loan and make sure you make all your payments on time. But you may find yourself in a situation where you're faced with several different bills that are due and not enough money. In this case, what you want to consider is your overall financial well-being. According to John Ulzheimer of SmartCredit.com, faced with the decision between putting extra money toward your credit card or your installment loan, it might make more sense to choose the credit card.
- Time: 7 “Smart” Credit Tips That Aren’t
- Bankrate: If I Pay Off Loan, How's My Credit Score?
- Smart Credit: Why Doesn’t Paying Off an Installment Loan Improve My Credit Scores?
- Mint: Which Debt Should I Pay Off First?
- Robinson Brog Leiward Greene Genovese and Gluck, PC: Loan Prepayment Penalties
- CFPB. "What Is a Payday Loan?" Accessed Sept. 18, 2020.
Specializing in food and business, Melissa Haskin is a Oregon writer who received a Bachelor of Science in economics with an emphasis in business from Oregon State University. She completed graduate work in journalism at the University of Oregon and has contributed to publications such as "The Register-Guard," "Oregon Quarterly" and "Eugene Magazine."