How Credit Scores Affect Installment Loans

Installment loans are closely tied to credit scores. Your credit score will determine your options when it comes to borrowing money, and borrowing money will also impact your actual credit score based on how you handle the loan and its terms.

Your Credit Score and Borrowing Money

Credit scores are a numerical measure of how trustworthy you are with money, at least as far as lenders are concerned. A person with a high credit score is seen as a person likely to repay a loan according to its terms because they have borrowed and repaid money correctly in the past.


Someone with a bad credit score is seen as a much riskier borrower because something went wrong in that person’s past when it came to borrowing and repaying money. If you have made late payments or failed to pay back a loan, your credit score reflects that history, and it can take years to rebuild a low credit score once it has been impacted by past financial issues.


When it comes to installment loans, lenders will look first at your credit score to get a quick measure of you as a borrower. The lenders will quickly divide potential borrowers according to their credit scores. Credit scores range from 300 to 900 and are assigned by the credit bureaus. Lenders typically break down credit scores in the following ranges.

  • 760-900 is considered excellent.
  • 725-759 is considered very good.
  • 660-724 is considered good.
  • 600-659 is considered fair.
  • 300-599 is considered poor or bad credit.

While credit isn’t the only factor lenders consider when you apply for a loan or credit card, it is one of the most important. (Other factors lenders consider include things like how many other payments you’re making already and your income.)


Typically, the higher your credit score, the more options for loans you have because lenders trust you to repay the money you borrow. If you have bad credit, you will be limited in the types of loans you can find, but you will still have options. Lenders who offer bad credit loans will typically require additional fees, higher interest payments or collateral to help secure the loan should you have trouble repaying.

Your Credit Score and Installment Loans

If you have a credit score that is between 600 and 660, or fair credit, you may be offered an installment loan when you ask a lender to borrow money. Installment loans are very specific terms to offer some safety to the lender but will have more flexibility than the loans offered to those with bad credit.


When you borrow money in an installment loan, you can expect the loan to include specific terms.


The Principle

This is the original amount you requested in the loan.



The lender will ask you to pay for borrowing the money. The interest is a percentage of the principle that you will repay for the privilege of borrowing. The interest rate on an installment loan may be higher than it would be on a personal loan, but it may be less than you’d expect to pay on a credit card.


Origination Fee

Some lenders will also charge a fee upfront when you borrow the money. This amount may be due when you borrow as a type of downpayment, or it might be included in the total amount you repay in the loan.


Monthly Payments

The total amount you borrowed plus the interest and possibly an origination fee will be divided across the number of months you will take to repay the loan. The more months you take the repay the loan, the less you’ll pay monthly, but the more you’ll pay overall due to the interest rate calculations.


These loan elements will vary between lenders based on your credit score, so it’s always worthwhile to compare loan terms from different lenders. The number of installment loans available online makes this comparison straightforward.

Installment Loans and Your Credit Score

Not only does your credit score impact your options for installment loans, but your new installment loan will also impact your credit score. Once you’ve decided on a new installment loan, you’ll receive the funds, and after a few weeks, you’ll start repaying the loan.


Credit bureaus will immediately receive information about you applying for, taking on the loan, and then repaying it – all of which will impact your credit score.


New Credit Inquiries

When you complete an application for a new installment loan, each inquiry is reported to the credit bureaus. New inquiries will reduce your credit score and the inquiries can stay on your credit score for years. Fortunately, inquiries don’t have a large impact on your score, but there will be a small impact.


Increase in the Amount Owed

Once you take on a new loan, your credit score will be impacted since you’ve increased the amount of money you’ve borrowed and the amount of money you owe. This may have a short-term negative effect on your score but can create substantial long-term benefits as you show you are a worthy credit risk to future lenders.


Credit Bureaus Report Your Payments

Once you start making on-time payments for your new installment loan, the lender will report those payments to the credit bureaus. Each payment will help boost your credit score, showing that you are taking care of your financial business. When you’ve paid down and then paid off the loan completely, your credit score will positively reflect your hard work.



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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.