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Is a Car Loan an Installment Loan?

Yes, a car loan is an installment loan. As such, it has a set balance which includes the principal, all fees, and interest. You will have defined payments that will not change and the line of credit will close once the final payment is made.

The Impact of an Installment Loan on Your Credit

It is important that you make all payments for an installment loan on time because FICO builds thirty-five percent of your credit score based on payment history. Since FICO scores are the most widely used in America, you will most likely have this score pulled when you apply for new credit. A single late payment can drop your credit score by as much as 100 points. That drop can be the difference between approval and denial, or force you to pay a much higher interest rate on your next loan or credit card. In fact, studies have shown that bad credit can cost you up to $200,000 over the course of your life!

Revolving Credit and Your “Credit Mix”

While it is important to use installment loans properly in order to build a high credit score, you cannot ignore revolving credit lines, such as credit cards. An additional ten percent of your credit score is based on the variety of credit lines you have used. You will be able to build the highest possible credit score by using a mixture of installment loans and revolving credit, especially if you keep the balances on your credit cards under thirty percent of your available credit limits. This shows lenders, as well as the credit-scoring algorithms, that you are a creditworthy borrower who utilizes credit in a responsible fashion.

About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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