What Is an Instalment Loan?

Many people come to a point in their lives when they need to look for loan options to consider. One loan type is called an instalment loan. It is a loan that allows customers to borrow set amounts of money that will be repaid to the lender each month with fixed payments. These payments will include the interest for the entire loan and will depend on different factors, including your credit score, the size of the loan borrowed and the length of the repayment term.

Repayment terms for instalment loans can range from a couple of months to over 30 years. Both unsecured and secured instalment loans may be tied to collateral such as personal property. These types of loans differ from revolving credit (such as credit cards) because you will borrow a lump sum instead of a small amount over time from a line of credit.

Instalment Loan Types

The four most common instalment loans are car loans, mortgages, student loans and personal loans. Aside from mortgages and student loans, most instalment loan products offer fixed interest rates and monthly payments that are the same each month. Some instalment loans may be used for other purposes such as refinancing your car loan or consolidating debts.

Instalment Loan Pros and Cons

It is important to make educated decisions when comparing loan options. When it comes to instalment loans, there are some basic pros and cons to consider.

Pros of Installment Loans

1. Fixed Interest Rates

When you get approved for an instalment loan, the interest rate will always remain the same, even when changes in the market take place.

2. Fixed Monthly Payments

Instalment loans are easier to budget for than others because payments will be the same each month and due on the same day.

3. Diversify Your Credit

Instalment loans can help to diversify your mix of credit products. When you add a new or additional instalment loan product, lenders will see that you are responsible for using different types of credit and can manage your budget effectively.

4. Raise Credit Score

If you take out an instalment loan and pay your monthly payments on time, you will see your credit score begin to rise.

Cons of Installment Loans

1. Potential Penalties and Fees

Some lenders will charge prepayment or origination fees on their instalment loans. It is best to ask a lender about potential fees before applying.

2. Potential High-Interest Rate

Depending on the instalment loan lender you choose to apply with, the interest rate attached to the loan will depend on the credit scores of the borrower. Instalment loans with high-interest rates significantly impact how much you pay on your loan.

3. Collateral May Be Needed

When lenders feel borrowers will have trouble repaying a loan they offer, collateral may be necessary to get approval. Collateral is necessary to lessen the risk a lender takes when offering loans to borrowers with less-than-perfect credit.

Even though instalment loans have their downsides, people with all credit ratings can find them to be useful. They can be a better option than payday loans that are riskier to apply for. Even though they seem appealing for short-term use, they have drawbacks as well.

Instalment Loans vs Credit Cards

Instalment loans and credit cards are two of the most common ways people borrow money from lenders, but they’re different in many ways. Below are some of the common differences to take into consideration.

1. Monthly Payments

Instalment loans typically come with equal payments every month until the loan has been paid in full. With credit cards, on the other hand, monthly payments can vary significantly because of outstanding balances and daily compounded interest rates.

2. Availability Of Funds

When borrowing money using an instalment loan, the amount you borrow will be given to you in a lump sum. To add to the amount you borrow, you would have to fill out an additional credit application. Credit cards come with fixed credit lines, and the amount of credit you have available will be the difference between your limit and current balance. You may ask your lender to raise your credit limit if you are on good terms and have made your payments on time.

3. Interest Rate

Instalment loans often come with fixed interest rates that get locked into the life of your loan. Credit cards come with interest rates that can increase or decrease for many reasons such as the expiration of a promotional rate and late payments.

How To Get An Installment Loan

If an instalment loan seems like the right product for you, consider using an online payment estimator to see how much you can afford to borrow. Before applying, check your credit score to avoid the risk of any surprises that may get you denied. Most lenders will require personal documents such as proof of address, proof of identity, National Insurance Number and proof of income. Always do some research on lenders you are considering to ensure they are trustworthy. Websites like the TrustPilot or MoneySupermarket can give you insights that will help you choose the best lender for your loan needs.