How Many Installment Loans are Too Many?

by Ryan Yates

Are you worried about having too many installment loans? Well, you shouldn’t. The number of loans isn’t the problem: it’s the fixed monthly payments that can become the issue. If your debt to income ratio is too high, it doesn’t matter if it’s an installment or revolving account.
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What is the Appropriate Number of Installment Loans to Have?

There is not a certain number of installment loans to have. In general, too many installment loans is when you’ve overloaded yourself in debt. If you are either paying the minimum payment or not even that for all your debts, that’s when enough is enough.

If you’ve been to school and took out loans, it’s easy to have four or five installment loans due to your student loans. Each disbursement is a separate loan itself. Then, auto and home loans come into place, and in a few years you’ll find yourself with at least six loans. Creditors are well aware of this. In fact, there is a formula or factors that determine your overall credit score.

  1. 35% – Payment history
  2. 30% – Amounts owed
  3. 15% – Length of credit history
  4. 10% – New credit inquiries
  5. 10% – Types of credit used

So from these figures, just having too many installment loans is not the question, it’s your overall history of having the loans. A good mix of revolving and installment accounts on your credit report can prove you are a responsible consumer.

Will Paying off an Installment Loan Hurt My Score?

You may have heard that if you start paying off too many debts, it could lower your credit score. This is not entirely true. Eliminating something such as a credit card and closing the account has a negative impact because it minimizes the length of your credit history.

If you are considering paying off an installment loan or two, it, in fact, can help your credit score. It will stay on your report for at least 10 years, increasing the length of a positive credit history. It also shows that you have paid the debt off on time and in full, something every creditor wants to see.

Which Installment Loan Should I Consider Getting Rid of First?

If you do want to pay off your installment loan, pay off the one with the highest interest rate first. This will save you money down the line of which you can apply towards other debts. If your interest rates are the same, pay off the more recent loan first so you can continue to establish your lengthier loan period.

{ 1 comment… read it below or add one }

Mike James Collin January 24, 2015 at

One solution for improving your credit score is to pay down credit cards without closing your credit accounts. That way, you maintain a long history of managing credit, but prove creditworthiness. I propose that people consider three techniques of paying down credit cards, as temperament and motivation can be powerfully affected by the way people attack the problem: http://debtlenders.blogspot.com/2015/01/the-snowball-route-to-debt-freedom.html

The advice about paying off the highest-interest installment loans is well taken. While the Snowball method may work for people frustrated over credit card debt, paying off the higher interest rates really does work better from a mathematical standpoint. Also, installment loans tend to be for bigger items such as housing and vehicles.

No matter what method you’re using, I recommend making a spreadsheet and marking the progress you’re making. For example, you might see your balance shrink over time. That’s great, but “absence” of something doesn’t generally translate in the brain as “achievement” of something. Keep an extra column for the amount you’ve paid off. And as those numbers get bigger, reward yourself at various milestones for your good work.

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