Key takeaways

  • Review your financial situation, including your credit reports and debt-to-income ratio (DTI), to assess your chances of meeting a lender's eligibility requirements.
  • When shopping around for an installment loan, prequalify to compare rates, fees and repayment terms across as many lenders without harming your credit score.
  • Prequalify, if possible, to check estimated rates and terms you might receive from a lender.
  • If an installment loan doesn’t meet your borrowing needs, consider alternative options, such as a credit card or loan from a family member or friend.

Installment loans are credit products allowing you to borrow a lump sum you repay in fixed, monthly installments over a set period of time. Many lending options are installment loans, including personal loans, mortgages, auto loans and student loans.

If you haven’t already taken out an installment loan, you likely will at some point in your life. Luckily, choosing the right installment loan and managing it well can help you afford expenses and improve your credit score.

Look at each lender’s requirements to set your current and future self up for success. Compare them to your credit score, financial health, current debt load and previous repayment history before signing on.

Comparing installment loan lenders: 5 steps

After deciding on the exact type of loan you need, the next step is to compare lenders. When you compare lenders, it ensures that you know which offers the most competitive rates, favorable terms and lowest fees for your credit situation.

1. Check your credit report

Your credit report houses all of your credit history, including delinquent payments, hard credit inquiries and your current debt.

When you apply for a loan, lenders will examine your credit report to decide whether to approve you. This is done through a hard credit check, which will cause your score to temporarily fall by a few points. You can limit the impact by sending all your applications within a 14-day period, so they’re grouped into a single inquiry.

This is a necessary approval step for nearly every lender. But don’t worry — you can offset the score ding by making consistent, on-time monthly payments.

Every lender has different acceptance criteria. Regularly checking your credit score is a good way to track your overall financial health and gauge your approval odds. You’ll also want to look at your credit report at least once a year. It doesn’t show your credit score, but it does list everything that makes up your credit, like:

  • Your repayment history.
  • Borrowing habits.
  • Any negative marks.

Plus, regularly checking your credit report allows you to spot reporting errors and suspicious activity.

How to check your credit report

There’s an important distinction between your credit scores and your reports. Your credit reports summarize your credit history. Your score is a number a company like FICO or VantageScore comes up with based on your credit reports and their own scoring criteria.

You can check your credit report for free weekly by visiting AnnualCreditReport.com. This will give you reports from the top three credit bureaus lenders use when making application decisions — Experian, Equifax and TransUnion.

Many lenders use your FICO score to make lending decisions. If you want to check your credit score, most credit card companies give borrowers free access to their FICO credit score as a perk. You can also purchase your score from the credit bureaus.

2. Conduct a financial audit

Before taking on more debt of any kind, look at your monthly income and financial obligations. Taking on more than you can realistically afford could put you at risk of falling behind on payments and damaging your credit.

How to conduct a financial audit

The quickest way to find out whether you can afford a loan is to calculate your debt-to-income ratio (DTI). Your DTI measures how much of your monthly gross income is put toward debt and is expressed as a percentage. Try our DTI calculator to find this number easily.

Once you know your current DTI, calculate how much adding a new monthly loan payment would change it.

Most lenders prefer a DTI under 36 percent when you apply. If that’s not possible, aim to keep your DTI under 50 percent. The lower your DTI, the better your chance of getting approved or scoring a lower interest rate.

If you have a high DTI and don’t need the funds immediately, focus on  paying down your existing debt before taking on another balance.

3. Research the lenders’ eligibility criteria

Simplify your search by focusing on lenders likely to approve you based on your current financial details.

Where to find installment loans

Installment loans are offered by nearly every type of financial institution, including online lenders, banks, credit unions and peer-to-peer lenders. However, where you should spend your time looking for lenders may depend on your credit.

Borrowers with FICO scores above 670 can look to banks, online lenders and other good credit lenders. Those with lower credit scores often turn to credit unions, peer-to-peer lenders and online lenders specializing in fair credit loans.

Where to look also depends on the specific installment loan you need. For example, looking for a mortgage with a random online lender may offer fewer advantages than going with your bank. Banks sometimes offer a rate discount for existing customers.

What to look for in a lender

Each lender has different approval requirements.

Some will require a specific minimum income or credit score. Others may not state a specific number and instead require a steady income and healthy credit.

Before jumping into an application, read through the minimum eligibility requirements to make sure you meet the basic criteria. Most lenders house this information in a “frequently asked questions” section of their website.

4. Compare available terms

Whether a lender meets your needs is as important as the rates offered. Make sure you’re getting what you need out of your loan.

For example, if you need a flexible repayment structure, look for lenders that allow payment date changes. If you have a particular repayment period in mind, make sure your chosen lender offers it.

Also, investigate the fees each lender charges. Common fees include:

  • Origination fees: An origination fee is a set percentage — typically between 1 percent and 10 percent — of the approved loan amount. It is taken from the amount you receive or added to what you must pay back. Ideally, you want a lender that skips these fees to minimize borrowing costs.
  • Documentation fees: This fee covers the lenders’ costs for reviewing your application and underwriting your loan.
  • Prepayment penalties: Lenders charge these fees to discourage borrowers from making more than their set monthly payment and paying the loan off early. Repaying your loan early can mean the lender gets less interest, which is why some lenders discourage it. If you expect to repay your loan before your term is up, make sure to understand what it will cost you. Or, find a lender that doesn’t charge prepayment penalties.

5. Prequalify and compare rates

Prequalifying for a loan allows you to see your predicted eligibility odds and rates with no impact on your credit score. Not every lender offers prequalification but if possible, prequalify with at least three of your top lenders.

Research average rates for your credit band and type of loan. Compare that with your prequalified offers. Cross out the lenders that don’t offer competitive rates or are unlikely to approve you.

If you find that multiple lenders offer similar terms and rates, look for features that set them apart. Some companies offer benefits and perks, like autopay discounts, long grace periods and payment due date flexibility. Research each lender’s potential perks before applying for a loan.

How to get an installment loan with bad credit

Installment lenders prefer borrowers with high credit scores. While it may be harder to find lenders if you have bad credit, it’s not impossible.

  • Improve your credit score: If you don’t need the funds immediately, consider improving your credit score before taking on a loan. While you can’t grow your credit overnight, there are things you can do to build credit quickly. As a first step, look for reporting errors on your credit report. Asking the credit bureau to correct errors like incorrectly marked account statuses may result in a better score within 30 days. However, the best way to grow — and sustain —credit growth is through good repayment history and credit utilization. Focus on making regular, timely payments and paying off any late balances to grow your score.
  • Look into bad-credit lenders: Bad credit lenders often adopt untraditional lending and approval models to extend credit to borrowers with less-than-perfect scores. Remember that these loans often come with higher rates and fees than loans for good credit borrowers.
  • Consider a secured installment loan: Some lenders offer secured installment loans to those with poor credit. These loans are backed by collateral, like a house or car, reducing the risk for the lender or company. Beware: If you fail to make your monthly payments, the lender can legally seize your collateral.

Alternatives to installment loans

If an installment loan isn’t the best option for you, there are alternatives to help you get the funds you need.

  • Borrow money from a family member or close friend: If you decide to go this route, make sure to have a written agreement to hold both parties accountable. Uphold your end of the agreement to preserve your personal relationship.
  • Get a credit card with a promotional rate: Most credit cards come with steep interest rates that could make your spending costly. Opt for a card with a 0 percent interest rate introductory period if you qualify. During the intro period, you can pay down your balance without accumulating interest. Just make sure the card waives, not defers, your interest during the promotional period.

The bottom line

Whether you’re looking to finance education-related expenses, a big-ticket item or a much-needed home renovation, installment loans can be a great option to make these more affordable. That said, not all installment loans are created equal.

Assess your financial health and compare offers from multiple lenders before deciding on a loan. Doing this will help you narrow down your choices and choose the loan with the best terms and interest rates for your situation.