What is an instalment loan?
An instalment loan also known as a payday loan is typically repaid through scheduled payment periods, usually weekly or monthly. This can include a huge range of purposes, with the most common being short term emergency needs.
How do Instalment loans work?
Instalment loans work by allowing a borrower to repay a loan over a set period of time. This means that once a borrower has agreed with a lender on an amount to be borrowed, the lender will then decide how long the borrower will have to repay the loan as well as which dates the money will leave the account. This should have a smaller impact on a monthly budget and allow borrowers to maintain a higher standard of living.
Every month a borrower will then be required to repay part of their loan, plus interest. Given that the interest on an instalment loan is charged on a daily basis, over time the repayments will get smaller and more manageable. Some lenders also allow a borrower to repay their loan early.
How do repayments work?
Instalment loan repayments are structured and should be clearly set out from the start. A loan agreement will be drawn up and signed, between the lender and the borrower – often digitally. The agreement should detail the amount to be borrowed, how the repayments will be split and when the monthly repayment will be. This allows a borrower to plan their finances well in advance, and have more control over their long term finances.
Can instalment loans help with bad credit?
If you are able to make the repayments on your instalment loan you are showing positive financial responsibility and action. This may in theory reflect advantageously upon your credit score. However, if you are unable to make the repayments this will damage your credit score further and therefore we do not recommend taking out an instalment loan for the sake of building credit.
What are the advantages of instalment loans?
Fixed interest rates: This means borrowers know exactly what to expect over a set time period.
Lower monthly payments: Rather than borrowing for a very short amount of time, instalment loans are typically borrowed over 3-6 months allowing for lower and more manageable repayments.
Become a responsible borrower: If you pay off your instalment loan on time then it can help improve your relationship with your budgeting and planning future finances.
Spread the total interest: Every month you pay off a portion of the loan plus interest enabling a gradual pay off with more affordable payments.
Planning ahead: Knowing precisely how much money you have to pay back monthly, you can create a clear budget and plan ahead.
What is the eligibility criteria for an Instalment loan?
To apply and be approved for an instalment loan you need to:
- Be over 18 years old
- Be a permanent UK resident
- Have a permanent UK address
- Be in employment
- Hold a UK bank account
- Some may require a guarantor
Why should you take out an instalment loan?
Reasons for taking out an instalment loan could include:
- Financial emergencies
- Necessary home improvement
- Appliance repairs
- Debt consolidation
- Private Emergency Dental and medical treatment
- Emergency travel expenses
What are the disadvantages of instalment loans?
Stringent Checks: Given the nature of instalment loans and the amounts being lent, most lenders will be extremely cautious and will carry out thorough checks before lending any money.
Prepayment may not be allowed: Most lenders will charge a penalty if you wish to pay off the loan early
Late payment fees: If you are late with your payments then you will be charged an additional sum by the lender which can actually increase your debt.
Consequences of missed payments: Not only will you be charged if you miss payments, but this could also affect your credit score. This means you may find it difficult to secure approval for other loans or even gain access to a phone contract in the future.