Instalment credit is a type of credit where you pay off a loan gradually over time. This is different from a loan, where you borrow money all at once and have to pay it back immediately or by a certain date, such as a bridging loan. With instalment credit, you instead pay off the loan in smaller chunks, usually over months, weeks or days.
Instalment credit makes it easier for you to manage your finances through predictable monthly costs. Plus, it can be a great way to access financial products that you wouldn’t usually be able to afford.
So why use instalment credit? What’s it all about? How can it work for you? Throughout this guide, we will dive into everything you need to know. But to get started, there are two main types of instalment credit you’ll need to be aware of; secured and unsecured.
Secured Credit – When you want to take out a loan but you want beneficial interest rates and security, you’ll use a secured credit option. Secured credit allows you to put up collateral to help guarantee to your loan provider that you’re capable of repaying your loan and there’s less risk for all involved.
It is the most popular form of instalment loan because it offers security from a third party such as a bank, mortgage, or trust deeds. It’s also the most common form of instalment loan because it is much easier for banks to approve than unsecured credit, and there are many more options available when accessing one.
A mortgage is a common example because your loan is backed up and secured by the property’s value. If you’re unable to make payments, the bank can repossess the property, to get their money back. Even on smaller personal loans, you can still secure them using shares, stocks, a trustee (such as a parent or guardian), or your savings.
Unsecured Credit – The most common type of unsecured instalment credit is the personal loan. Simply put, a loan is made with no security taken by the lender. You then repay it over a set period of time, with pre-agreed monthly payments. Unsecured loans tend to be smaller than secured loans, as most lenders will be uncomfortable lending very large amounts of money without security.
Your credit score is key to successfully taking out an instalment loan whether it’s secured or unsecured. Borrowers with a strong credit history will get the best deals. Borrowers with a very poor credit history may struggle to qualify for unsecured credit. Secured loans may be more realistic for borrowers with a poor credit as allow the lender to get their money back, even if the borrower stops making payments.
The benefits of using an instalment loan are pretty straightforward. They allow you to take a lump sum of money and repay it through regular, affordable monthly payments. This allows borrowers to afford items which would be impossible to buy without having to save for a long time.
The biggest risk comes from the fact that if you miss a payment or even multiple payments, you’re your credit history will be affected. This may make borrowing more difficult in the future. If the loan is secured, the lender is also likely to repossess these in order to get their money back.
To give you some examples of banks that offer instalment plans in the UK and the US, you can refer to the table below;
|UK banks that offer instalment credit plans||US banks that offer instalment credit plans|
What is the definition of Instalment Loan
An instalment loan provides a lump sum to borrowers and is repaid through regular monthly payments. Each payment is made up of both capital (or principal) and interest, and by making all payments on time and in full, the loan will be totally repaid at the end of the term.
“Instalment credit allows borrowers to manage large one-off costs, by spreading the financial shock over a set term. This makes it easier to budget and can make it easier to budget for those who would otherwise struggle” shares Gary Hemming, a financial advisor from ABC Finance.
What is the origin of the Instalment Loan?
The origins of this type of loan actually date back to the Middle Ages and Medieval times, when money lenders would lend out cash at a set rate over time. However, there is evidence that shows instalment loans with interest rates were even used in society as far back as the 6th Century.
However, while instalment loans have been used in one form or another for over 1,500 years, instalment loans are we know them today first came around in 1850, with the technology and appliance company Singer (although they were used before this by companies like Cowperthwaite & Sons as far back as 1807).
Singer offered instalment payment plans on their sewing machines which really helped to drive this form of credit forward. As stated by GetOutofDebt.org, other companies started to follow suit, with popular furniture companies, radios, electric refrigerators, washing machines, clothing, and other costly product companies all using the payment format.
Records in the Denver Public Library state that by 1924, over 75% of all cars and automobiles were purchased on instalment loan plans.
How does an Instalment Loan work?
The process is simple. The person taking out a loan applies for the money; they get approved and then make monthly repayments over a set period of time. These payments are calculated at a level that will fully repay the loan and interest is paid in full over the loan term.
The benefits of instalment loans are:
1. Instalment loans allow you to finance big purchases.
2. You’re usually able to repay these loans early and save interest.
3. The monthly payments are usually fixed, or at the very least, predictable. This makes it easy to budget.
Instalment loan terms can vary, with unsecured instalment loans usually taken for anything from 6 months to 5 years. Secured instalment loans usually come with a longer term of 5-30 years.
Instalment loans do come with some risks, which should be considered. They are:
- If you fail to keep up repayments on an instalment loan, your credit history will suffer.
- If your loan is secured and you fail to keep up repayments, you will be at risk of losing the asset that you used as security.
- If your instalment loan comes with a variable interest rate, you could see your monthly payments increasing should interest rates increase.
With all of this combined, it’s easy to see why many prefer using instalment loans to outright paying for something This is why it’s important to remember that taking out a loan isn’t going to magically make you rich; but instead will simply help you gain access to the funds necessary for your own personal goals.
How can I Apply for an Instalment Loan?
A borrower applies for an instalment loan by completing the lenders application form. This will usually trigger an automated credit check and other eligibility checks. The application will ask for details of the loan, such as the loan amount, required term, reason for the loan and some personal details.
The lender will then underwrite the application based on this information and may request further documents from you. These may include payslips (to prove your income), or bank statements to give them an insight into how well managed your finances are.
This forms the basis of the application process and once complete, the loan can be issued.
What are the documents required for an Instalment Loan application?
When you’re going through the process of making a loan application, sometimes the provider will require certain documentation that you’ll want to prepare beforehand. These documents include:
- Your residency documents (passport, driving licence) and any other government-issued identification – These are referred to as ‘identity verification’ documents because you’re proving who you are to the loan provider.
- Proof of income and bank statements – This is to allow the lender to assess your finances, ensuring that the loan will be affordable.
Who should use an Instalment Loan?
There’s really no end to the people who can take out an instalment loan. The vast majority of people in their lifetime will use an instalment loan of sorts, whether in the form of a pay-monthly phone contract, a mortgage, or a car loan. Even spreading the cost of buying a new TV over three months is a form of instalment loan.
It really doesn’t matter whether you’re a;
- Teachers Doctors
- Shopkeepers and other small business owners
- People who want to buy a car, home or new phone
In the right circumstances, instalment loans can help almost anyone.
What are the Examples of Instalment Loans?
There are so many types of instalment loans out there that it can understandably get a little overwhelming when you’re looking for which one is right for you. However, to make things easy, here’s a breakdown of some of the instalment loans you’re probably going to come across at some point in your life.
Auto (car) Loan: If you’re looking to get a new car, or even just some minor repairs done to your existing one, an auto loan is probably the option for you.
Mortgage: If you want to buy a new home or even just make some improvements to the one you already own, an instalment loan might be what you’re looking for.
Personal loans: Personal loans are a very common type of instalment loan that can be used for almost any purpose.
Whatever type of instalment loan you can out, they all work in the same way, so let’s check out an example.
Let’s say you were buying a new computer. The total value of the computer is £1,500. You find a personal loan that allows you to spread the cost out over 18 months at a rate of 18.2% APR.
This works out to be £94.88 per month, meaning you’re paying back a total of £1707.83 over the course of the loan. The formula you could use to represent this would be;
What are the banks that give Instalment Loans?
Here are the main lenders for instalment loan.
|Provider||Representative APR||Maximum Term Length|
|M&S Bank||2.8%||7 years|
|Santander Bank||2.8%||7 years|
|Post Office||2.9%||7 years|
3 Types of Instalment Credit: Differences, Examples, and Definitions
There are three very common types of instalment loan that we break down in more detail.
1. Personal loan Instalment Credit
A personal loan is a type of loan that you can take out from a bank or other provider; they are unsecured, making them a simple product. Personal loans can be taken out by almost anybody, subject to their income being sufficient to repay the loan and their credit history.
Personal loans are offered at a range of rates, and are usually repair over 1-5 years. There are advantages to such loans, including the ability to spread the cost of something out and the fact that the application process is quick and simple.
On the other hand, there are also disadvantages to personal loans. The main disadvantages are that rates can be high for borrowers with a weaker credit record and that failure to keep up repayments can reduce your credit score.
2. Auto loan Instalment Credit
An auto loan is a loan that is specifically used to invest in and purchase cars. If you were buying a car, new or used, from a dealership and they offered a finance option, this would be an instalment loan.
Auto loans are usually offered by approved dealerships, banks and specialist lenders, and you can choose to make your car payments either weekly, biweekly or monthly. Typically most car loan instalments include a down payment or deposit of sorts, which must be paid in full before the owning company will release the title on their vehicle. The down payment is generally between 5% and 20% of the total value, so buying a £30,000 vehicle from the dealership would represent approximately £1,800 as a down payment.
In most cases, auto loans last between 12-60 months and the total amount of interest you will pay is determined by your credit history, which means that there are various different types of auto loans available depending on how good or bad it is.
Auto loans offer some advantages to borrowers, such as low rates, ease in repaying and high financing options.
On the other hand, some disadvantages to be aware of include high rates (for some car loans) and high monthly payments, many dealerships don’t offer auto loans but can still offer financing if you are able to get credit or go with a friend who has good credit.
3. Mortgages Instalment Credit
A mortgage is an arrangement that allows one party to borrow money from the other, securing it against a property. The borrower makes regular payments, which allow them to repay the loan in full by the end of the term.
There are clear advantages to taking out a mortgage. The most obvious advantage is that they allow you to purchase or refinance your property. This may allow you to afford a house or other item that would otherwise be unaffordable.
Mortgages can also help you avoid having to sell your home or lose it when some unforeseen circumstance occurs as they allow you to borrow funds relatively quickly.
Of course, there are disadvantages to be aware of as well. These include the fact that if you don’t keep up your repayments your lender will repossess your property.
How do instalment loans work?
Instalment loans allow you to borrow money and repay it over a set term through regular monthly payments.
What are the advantages of Instalment Credit?
The advantages of instalment credit are:
The first, of course, is being able to make big purchases. If you don’t have the money to buy something you want or need outright, then you can instead pay for it over a period of time that you choose.
What’s more, since you’ll know what your monthly payments will be as you take out the loan, these forms of loan are very easy to budget for. You’re literally just paying the same amount off your loan the same day of every month until it’s paid off.
In many cases, you’ll also have the opportunity to pay off your loan early if you want to. This will typically mean you’ll pay less interest, and even if you just wanted to pay off a little bit extra a month, most loan providers will allow you to do this.
Furthermore, taking out a loan and paying it off responsibly (making payments on time) will improve your credit score, meaning that you can then take out more loans and credit in the future, but you’ll have better deals and better interest rates.
What are the disadvantages of Instalment Credit?
The disadvantages of instalment credit are:
Firstly, there’s the risk of impulsive spending. In most cases, thanks to how instalment loans work, you can have access to large sums of money pretty much instantly, and if you’re the type of person who can be pretty spontaneous with their purchases, then this could encourage this.
As with most loans (so not really a big disadvantage), there are fees you’ll need to pay if you can’t keep up with repayments and you don’t make them on time.
Finally, if you do have problems with your loan and you don’t make payments it will negatively impact your credit rating, meaning it may be much harder to take out credit and loans in the future. Such issues can affect you for decades to come.
How to apply for Instalment Credit
Taking out an instalment loan is easy. All you need to do is do your research, find a suitable loan provider and then apply. In most cases, you’ll be able to do this online or over the phone and, if accepted, then the money will typically be delivered into your preferred bank account within a matter of hours, ready for spending on whatever you’re purchasing.
Are instalment loans bad for credit?
No, instalment loans are actually pretty good for your credit score, as long as you’re managing your finances responsibly. By making sure you’re paying your repayments on time, you can actually build your credit score, which will provide you with better finance opportunities in the future.
There are many credit score factors you should be aware of, such as having a diverse range of credit usage, being able to pay back loans on time, and being able to manage multiple loans and forms of credit. Taking out an instalment loan can help build your credit score in all of these ways. The only way this type of loan will be bad for your credit is if you aren’t able to keep up with your payments.