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Installment Debt April 8, 2011

Posted by CredZoo - Tame Your Credit in New Credit Information, Tips For Good Credit.
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Part II in our “How to Manage Debt & Credit” posts: What is installment Debt? Is it good or bad?

Debt comes in many forms, and most types help us in our daily lives — when used responsibly. Most people cannot buy a home without some financial help, and many cannot buy a car (especially a new one) without some sort of financing. The money borrowed to purchase large-ticket items is called installment debt: The debtor pays a portion of the total at regular intervals over a specified period of time. At the end of that time period, the loan with interest is paid off.

Installment debt allows you to purchase items at a competitive interest rate: for example, 5% to 7% for a 30-year home mortgage and 8% or 9% for a car loan. The loan is paid back on an amortizing schedule, monthly payments of a fixed amount that remain constant over the life of the loan. At first, most of the monthly payment consists of interest. In later years, principal begins to be paid down.

Installment debt is easily budgeted and the debt is eliminated on a predetermined date. Even for those who may actually have the cash to purchase the desired item, installment debt can make financial sense if you can earn a higher return (after taxes) on your investment of cash than you must pay on your installment debt.

Having an installment loan can also help an individual establish credit. One factor considered by credit reporting agencies when calculating credit scores is how many types of debt a consumer has utilized. If a person has made timely payments on both a credit card and installment debt, he will receive a higher score than if he his only obligations have been revolving credit. While it is good to be cautious before entering into any loan agreement, an installment debt may be a good option. Handled properly, it is a way to acquire a large ticket item through budgeted payments. The lower interest rate and set term can be an attractive alternative to large credit card purchases.