You finally got a loan approved for that big thing you are eyeing to buy or something to invest in. The next thing you need to know is how to repay it, but how? Your creditor must be saying about a “payment plan” but how does it really work? If you’re a first-time borrower or not, it’s good to know how payment plans work. We are here to tell you everything there is to know about it as we debunk the term, “payment plan.”
What is a Payment Plan?
A payment plan (also known as an installment plan) is exactly what it sounds like: it is defined as “an organized schedule on how to repay outstanding debts.” Payment plans can be applied to a wide range of industries or credit products that involve real estate, auto, college tuition and others. Credit companies apply payment plans to help creditors pay debts based on their current capacity. Payment plans are usually paid on a monthly basis.
Things You Need to Know About Payment Plans
1. People with Bad Credit Scores Can Still Avail of Payment Plans
Most payment plan services do not perform credit checks which means anyone can avail of these services, including people with bad credit scores. For a quick review, a credit score is a number between 300-800 which tells about the capacity of the creditor to repay a debt. Creditors with scores of 300-629 fall into the “poor” category. This means these people have limited loan approvals as this is considered risky by creditors.
2. Payment Plan Services Report to Credit Bureaus and Can Affect Credit Scores
Credit Bureaus are credit reporting agencies aimed to provide and collect a person’s credit information. In the United States, the three major credit bureaus are Equifax, Experian, and TransUnion. Payment plan services report to these credit bureaus which means they can affect your credit score. It is important that you must pay on time and pay regularly to avoid a negative impact on your credit score.
3. Frequency of Payments Can Vary
While most payment plan services offer a monthly installment, it can still vary. The frequency of payment depends on the service selected and your own budget. Some payment plan services require a certain number of payments for 2 months or so. It is advised to choose what works and what’s best based on your current capacity.
4. Payment Plan Interest Rates Differ
It is obvious that payment plans offer interest as these are payments for credit after all. While there are services offering zero percent interest, most services do offer interests. Interest rates can range from 0 to 30% depending on how long you need to pay for certain credit. Choose a service that offers low-interest rates and those that provide flexible payment schedules.
In summary, payment plans are generally a good way to finance a large purchase over a certain period of time. Creditors should always remember these important facts about payment plans as a guide in choosing the right service. It is always better to know a step or two ahead and to become smarter with our finances. It’s our hard-earned money after all.
Do you still have trouble with how payment plans work? Book a free consultation today with our advisors here at CreditPlanned.