Instalment credit allows you to borrow funds as needed and repay them over a set time in agreed instalments. In this article, we will provide a comprehensive guide to instalment credit. We’ll explain what it is, how it works, and who should consider taking out this type of loan.
We’ll also dispel some of the myths that are often associated with instalment credit. So, if you’re considering borrowing money in this way, read on for all the information you need.
What is Instalment Credit?
Instalment credit is a type of loan that allows the borrower to make payments over time. This can be done in regular instalments which reduce the balance slowly over time. The main benefit of this type of credit is that you have a set schedule for repaying the debt and know how much interest will be paid over the term. This is in contrast to revolving credit, which is open-ended and therefore more difficult to predict costs and interest charges.
An example of instalment credit would be a car loan. You borrow a set amount of money from the lender, and then repay it over an agreed period of time. The interest rate is usually fixed, which means you’ll know exactly how much you need to repay each month. For example, if the car is £5,000 with a £500 deposit, and you’re paying it back over two years, you’ll pay instalments of £203, including the interest from an assumed interest of 7.9% APR (which is currently the average rate), meaning you’ll pay back everything you owe over the time period, paying £375 for credit.
There are two main types of instalment credit: secured and unsecured. Secured loans are backed by an asset, such as a car or property. This means that if you default on the loan, the lender can repossess your asset. An asset does not back unsecured loans, so they tend to have higher interest rates. Borrowers should consider taking out an unsecured loan if they don’t have any assets to offer as collateral. This type of loan is also a good option for borrowers who have a bad credit history, as it’s easier to qualify for than a secured loan.
How does Instalment Credit Work?
As we mentioned above, instalment credit is a type of loan that allows the borrower to make payments over time. The terms of the loan will vary depending on the lender, but they will have to be repaid within a specific timeframe. The interest rate on an instalment loan is usually fixed, which means you’ll know exactly how much you need to repay each month. This can make budgeting for your repayments easier, as you won’t have to worry about fluctuating interest rates.
Once you’ve agreed to the loan terms, you’ll make regular payments until it’s paid off. Depending on the size of the loan, this could be anything from a few months to several years. It’s important to remember that you’ll be responsible for repaying the entire loan, plus any charged interest and fees. If you miss a payment, you may be charged a late fee, and your credit score could be impacted.
There are many opportunities where you could take out an instalment loan, such as paying for a car, buying a sofa or other product and paying for it over the course of three months, or even going on a holiday and paying for it over the course of a year. You’re typically going to use an instalment form of credit when making large purchases for products or services and want to spread out the cost.
How to apply for Instalment Credit
The application process for an instalment loan is similar to that of any other type of loan. You’ll need to fill out an application form and provide some personal details, such as your name, address, date of birth, and income. You’ll also need to provide some financial information, such as your bank account details and employment history. The lender will use this information to assess your ability to repay the loan.
Once you’ve submitted your application, the lender will carry out a credit check. This is done to see if you’re eligible for the loan and to check your credit history. If you have a bad credit history, you may still be able to qualify for an instalment loan, but may have to pay a higher interest rate.
Once your application has been approved, you’ll need to sign the loan agreement and provide any required supporting documents. These could include proof of income, bank statements, and ID. From here, the lender will transfer the funds to your bank account, and you’ll be able to start making repayments on the date you agreed with the lender.
However, before applying for a loan, you need to make sure you’re aware that there are typically some eligibility requirements required that could determine whether or not you can acquire a loan. These requirements include:
- You must be 18 years of age or older
- You must be a citizen or permanent resident of the country you’re applying in
- You must have a regular source of income
- You must have a good credit history
If you meet these requirements, you should have no problem applying for an instalment loan. However, even if you don’t meet all of the requirements, you may still qualify with some lenders. It’s also important to compare different lenders before applying for a loan. This way, you can make sure you’re getting the best deal possible. When comparing lenders, you should look at things like the interest rate, fees, and repayment terms.
You should also make sure you read the fine print of any loan agreement before signing it. This way, you’ll know exactly what you agree to and won’t be caught off guard by any hidden fees or charges within your chosen instalment credit application.
What are the types of Instalment Credit?
There are two main types of instalment credit loans that we’ve discussed already, but it’s not the only type. In fact, many of the most popular types of credit are instalment loans, the types of which we’ll explore through this section!
- Secured instalment loan – A secured loan is one where you put up an asset, such as your home or car, as securityl. This means that if you can’t repay the loan, the lender can take possession of the asset to recoup their losses. Because of this, lenders typically offer lower interest rates on secured loans.
- Unsecured instalment loan – An unsecured loan is one where you don’t put up any assets as security for the loan. This means that if you can’t repay the loan, the lender can’t take possession of any of your assets. However, because the lender has more risk, they typically charge higher interest rates on unsecured loans.
- Mortgages – A mortgage is a type of loan that’s used to finance the purchase of a property. Mortgages are typically repaid over a period of 15 to 30 years and have much lower interest rates than other types of loans.
- Car loans – A car loan is a type of loan that’s used to finance the purchase of a car. Car loans are typically repaid over a period of two to seven years and have relatively low-interest rates.
- Personal loans – A personal loan is a type of unsecured loan that can be used for anything you want, such as consolidating debt, paying for home improvements, or financing a wedding. Personal loans typically have higher interest rates than secured loans but lower interest rates than credit cards.
- Student loans – A student loan is a type of loan that’s used to finance the costs of higher education, such as tuition, books, and living expenses. Student loans typically have lower interest rates than other types of loans but may not be able to be discharged in bankruptcy.
How Instalment Credit Affects Your Credit
Taking out an instalment loan may initially reduce your credit score, but will increase it in the longer term if you make your repayments on time.
Your credit score is a number that represents your creditworthiness. It’s used by lenders to determine whether or not you’re a good candidate for a loan and what interest rate they should offer you. A high credit score means you’re a low-risk borrower, which means you’re more likely to get approved for a loan and get a lower interest rate. A low credit score means you’re a high-risk borrower, which means you’re less likely to get approved for a loan and may have to pay a higher interest rate. The question of what affects your credit score is a key one and should be understood by all borrowers, for further reading on this subject read Credit Score: Meaning, Range, Factors, Improving It and What Affects Your Credit Score?
Instalment loans can help improve your credit score if they’re paid on time and in full. This is because instalment loans are typically larger loans with fixed payments, which shows lenders that you’re capable of handling a larger loan. However, if you miss payments or default on an instalment loan, it can have a negative impact on your credit score. This is because late payments and defaults are typically reported to the credit bureaus, which can lower your credit score.
When you’re taking out an instalment loan, these are all things you should be aware of, which is why you should only take out a loan you’re able to afford. While this can differ from person to person, an average amount to take out would sit around the £5,000 mark, but it really depends on your income levels and personal circumstances.
All in all, it’s always going to be worth checking out how to control your credit score (we have an article on credit score: meaning, range, factors, improving it right here) because it will help you remain far more financially secure in the future, as well as helping you access the best deals on products.
What are the advantages of Instalment Credit?
In order to see whether instalment credit is the right form of credit for you, you need to know exactly what these forms of credit can offer you, and the advantages they have over other credit types. With this in mind, here’s a table so you can quickly reference and compare the pros and cons, and then a little more detail below.
|Advantages of Instalment Credit||Disadvantages of Instalment Credit|
|The application process is typically fast and you can receive the money in your account quickly.||You may pay more interest over longer periods of time.|
|The requirements required to take out a loan are relatively small and easy.||There can be some fees involved when using this kind of loan.|
|Fixed payments on the loan mean you know exactly how much you’re spending, meaning you can budget easily.||If you miss a payment, your credit score can be negatively affected.|
|You can purchase larger products or services easier by spreading the cost over a longer period of time.||There can be credit limits on your loan.|
|You can use your ability to repay your loan repayments on time to build up your credit score.|
- Fast application process – One of the main advantages of instalment credit is that they generally have a speedy application process. This is because most lenders will allow you to apply online, and you can usually get an answer within minutes.
- High approval rate – Another advantage of instalment credit is that they have a high approval rate. This is because the requirements for approval are usually not as stringent as other types of loans, such as personal loans.
- Fixed payments – Another advantage of instalment credit is that they typically have fixed payments. This means that you’ll know exactly how much you need to pay each month, which can make budgeting easier.
- Make larger costs more affordable – One of the biggest advantages of instalment credit is that it can make larger costs more affordable. This is because you can spread the cost of the loan over a longer period of time, which can make it more manageable.
- Flexible repayment process – Another advantage of instalment credit is that they have a flexible repayment process. This means that you can usually choose how long you want to take to repay the loan and how much you want to spend per month, which can be helpful if you need to make lower monthly payments.
- Build up your credit score – One of the main advantages of instalment credit is that it can help you build up your credit score. This is because on-time payments and full repayment can help improve your credit score, which can be beneficial in the future by allowing you access to better deals, better interest rates, and higher credit limits. However, this is not as prevalent as other forms of credit.
- You can get the money fast – One of the biggest advantages of instalment credit is that you can get the money fast. This is because most lenders will deposit the funds into your account within 24 hours, which means you can usually access the funds quickly.
What are the disadvantages of Instalment Credit?
The disadvantages of instalment credit are:
- You may pay more interest – One of the biggest disadvantages of instalment credit is that you may pay more interest. This is because the longer you take to repay the loan, the more interest you will accrue. This means that if you’re not careful, you could end up paying back more than you originally borrowed.
- You may need to pay a fee – Another disadvantage of instalment credit is that you may need to pay a fee. This is typically a one-time fee that’s charged when you first take out the loan. This fee can vary depending on the lender, but it’s usually a percentage of the total loan amount. This is more common on secured loans than unsecured.
- Your credit score may suffer – Another disadvantage of instalment credit is that your credit score may suffer. This is because if you miss a payment or make a late payment, it will be reported to the credit bureau and will negatively impact your credit score. This can make it challenging to get approved for other forms of credit in the future.
- You may be limited to a certain amount – One final disadvantage of instalment credit is that you may be limited to a certain amount. This is because most lenders will only approve you for a certain amount based on your income and employment history. This means that if you need a larger loan, you may need to look elsewhere.
Instalment credit can be a great way to finance a large purchase or consolidate debt. However, it’s important to understand the advantages and disadvantages of this type of credit before you make a decision. By understanding both the positives and negatives, you can make an informed decision that’s right for you.
What is the difference between Instalment Credit and Revolving Credit?
Now that you know all about instalment credit, it’s time to take a look at the difference between instalment credit and revolving credit. After all, these are two of the most common types of credit, and it’s important to understand the difference between them.
With this in mind, here are the key differences between instalment credit and revolving credit:
- You make fixed monthly payments
- The interest rate is usually fixed
- You can usually borrow a larger amount of money
With instalment credit, you’ll typically use this on purchases such as a car or a home. The payments are fixed, which means you’ll know exactly how much you need to pay each month. This can make budgeting easier.
- You have a flexible repayment process
- The interest rate is usually variable
- You can usually only borrow a small amount of money
You’ll typically use revolving credit for smaller purchases or for emergency expenses. The repayment process is flexible, which means you can make smaller payments when you have the money. However, this also means that the debt can take longer to repay.Both instalment credit and revolving credit have their own advantages and disadvantages. It’s important to understand these before you decide which type of credit.
Is Instalment Credit Beneficial?
Yes, instalment credit can be beneficial. It can help you finance a large purchase or consolidate debt to improve your finances. If you’re considering taking out instalment credit, be sure to educate yourself on the pros and cons first and how you can actually use instalment loans to benefit your life, not as an impulsive decision. That way, you can make the best decision for your financial needs.