Many people think credit cards are the only way to build credit — but installment loans can be just as powerful. In fact, installment loans are one of the most effective tools for establishing and improving your credit history. Whether you're starting from scratch or working to repair past damage, understanding how installment loans work can open doors to better financial opportunities.
What Is an Installment Loan?
An installment loan is money you borrow and pay back over time in fixed monthly payments. Unlike credit cards, which let you borrow repeatedly up to a limit, installment loans give you a set amount upfront. You then repay that amount plus interest in equal installments over a specific period—typically 12 to 60 months.
Common examples include auto loans, personal loans, and mortgages. But for credit-building purposes, credit builder loans are specially designed installment products that help you establish or improve your credit score.
How Installment Loans Build Credit
Installment loans boost your credit in several important ways. First, they demonstrate your ability to handle different types of credit. Credit scoring models reward diversity—having both revolving credit (like credit cards) and installment loans shows lenders you can manage multiple financial obligations.
Second, on-time payments are everything. Each payment you make gets reported to the three major credit bureaus: Experian, Equifax, and TransUnion. Consistent, timely payments build a positive payment history, which accounts for about 35% of your credit score. Third, installment loans help lower your credit utilization ratio if you have credit card debt, since the loan amount isn't a revolving balance.
Finally, taking out an installment loan adds to your credit mix, which improves your overall credit profile over time.
Best Installment Loans for Building Credit
If you're specifically looking to build credit, credit builder loans are your best bet. These products are designed by lenders who understand that people with limited or damaged credit need a chance to prove themselves.
Self: The Self Credit Builder Account lets you build credit and savings simultaneously. You make monthly payments into a secured savings account, and Self reports your payments to all three bureaus. It's perfect if you want to build an emergency fund while rebuilding credit.
CreditStrong: This option lets you build up to $30,000 in credit history with affordable monthly payments. There's no hard pull, and payments report to all three bureaus. It's ideal if you want to show significant credit activity.
Cheers Credit Builder Loan: Cheers Financial offers one of the lowest APRs and one of the lowest total costs in the market. They charge no additional fees beyond a minimal APR, making it one of the most affordable credit builder loan options available.
Ava Credit Builder Loan: Ava offers a Credit Builder Loan alongside their credit builder card. The loan adds an installment account to your credit profile, and Ava reports to all three major bureaus. If you want to build both installment and revolving credit from a single platform, Ava is a strong choice.
Kikoff: Kikoff offers a unique approach by letting you make small monthly payments (as low as $5) that get reported to credit bureaus. It's flexible and works well for people on tight budgets.
Kovo: Kovo provides credit builder loans with transparent terms and quick funding. Their focus is helping people with limited credit establish a stronger financial foundation.
Each of these options works differently, so choose based on your budget and timeline. For more detailed comparisons, check out our guide to credit builder loans.
Cheers Credit Builder Loan
Cheers Credit Builder Loan
AI-powered credit builder with accelerated reporting to all 3 bureaus, designed to make credit building simple and affordable.
Loan Amount
Multiple plans (starting at $24/mo)
Term
24 months
APR
12.15% (fixed)
Admin Fee
$0
Monthly Fee
$0
Credit Check
No
Average Score Increase
95% of users with fair credit see a 20+ point increase in just 2 months
Ava Credit Builder Loan
Ava Credit Builder Loan
Ava gives you access to a suite of credit-building products including Credit Builder Card, Credit Builder Loan, and Rent Reporting. 74% of members seeing an increase in score in the first week.
Loan Amount
$300
Term
12 month
APR
0%
Admin Fee
Origination fee may apply in some states.
Monthly Fee
$8/mo (annual) or $10/mo (monthly)
Credit Check
No
Average Score Increase
74% of Ava members see a credit score improvement in less than 7 days
Kikoff Credit Account
Kikoff Credit Account
Everything you need to build your credit, right in one app. Build credit, lower debt, and unlock progress with tools that actually work.
Loan Amount
$750-$3,500 depends on the plan
Term
12 months
APR
0%
Admin Fee
$0
Monthly Fee
$5/month for Basic plan, $20/mo for Premium plan $35/mo for Ultimate plan
Credit Check
No
Average Score Increase
An avg increase of +86 points within a year with on-time payments
Magnum by CreditStrong
Magnum by CreditStrong
MAGNUM helps you build large amounts of credit. Build $2,000 to $25,000 of credit history starting at just $30/mo. No hard credit pull. Reports to all 3 bureaus.
Loan Amount
$2,000 to $25,000
Term
45 months or 120 months
APR
11.11%
Admin Fee
$25
Monthly Fee
$30/mo to $110/mo depends on the plan
Credit Check
No
Average Score Increase
88+ points average FICO score increase
Installment Loans vs Revolving Credit
Installment loans and revolving credit (like credit cards) serve different purposes in your credit profile. With an installment loan, you borrow a fixed amount and pay it back over a set timeline. With revolving credit, you have a credit limit and can borrow up to that limit repeatedly.
For credit building, having both types matters. Installment loans show you can commit to a structured payment plan, while credit cards demonstrate you can manage ongoing borrowing responsibly. If you only have credit card experience, adding an installment loan diversifies your credit mix and can boost your score.
Unsure which is right for you? Learn more by comparing a credit builder loan vs secured card.
What to Look for in a Credit Builder Loan
Not all credit builder loans are created equal. When evaluating options, focus on these key features:
Bureau Reporting: Make sure the lender reports to all three bureaus—Experian, Equifax, and TransUnion. If they only report to one or two, you're missing out on credit-building potential.
Transparent Fees: Look for clear, upfront pricing. Some credit builder loans have origination fees, monthly fees, or interest charges. Calculate the total cost before committing.
Flexible Terms: Can you choose your loan amount and payment timeline? Good credit builder loans let you customize terms to fit your situation.
Fast Funding: Some lenders fund within days, while others take weeks. If you need quick credit activity, faster funding matters.
Customer Support: You want accessible help if questions arise. Read reviews to see how responsive the lender is.
Risks to Watch Out For
While installment loans are powerful credit-building tools, they're not without risks. Missing payments can seriously damage your credit score. Since payment history is 35% of your score, even one late payment can set you back months.
Also, taking on debt you can't afford is counterproductive. Only borrow what you can realistically repay each month. Some people mistake credit building for an excuse to take on unnecessary debt—that's a trap.
Finally, be cautious of predatory lenders. High fees, unrealistic terms, or pressure to borrow more than you need are red flags. Stick with established, reputable lenders who have transparent practices and positive customer reviews.
If you're unsure whether an installment loan is right for you, consider other credit-building methods first. A secured credit card might be a gentler starting point if you have no credit history at all.
FAQ
How long does it take for an installment loan to build credit? You'll typically see credit score improvements within 1-2 months of on-time payments, though more significant gains take 6-12 months. For details, see our guide on how long to build credit.
Can I build credit with a personal loan? Yes, if the lender reports to the three major bureaus. However, credit builder loans are specifically designed for this purpose and often have better terms for people with limited credit.
What if I miss a payment on a credit builder loan? Missed payments get reported to the bureaus and can significantly hurt your score. Always prioritize making on-time payments—it's the entire point of using an installment loan to build credit.
Can I pay off a credit builder loan early? Many credit builder loans allow early payoff, but check the terms first. Some lenders reward this flexibility, while others don't. Paying early doesn't hurt your score and can actually help if you want to reduce your overall debt burden.
How do installment loans affect credit scores differently than credit cards? Both help your score, but they do it differently. Credit cards help more with credit utilization and ongoing borrowing management, while installment loans show your ability to commit to a structured repayment plan. Together, they create a stronger credit profile.
