Please note: High-cost short-term credit is unsuitable for sustained borrowing over long periods and would be expensive as a means of longer-term borrowing.
What is an instalment loan?
Instalment loans are paid back in a series of regular chunks, rather than in a single lump sum at the end of the term.
Perhaps the most well-known example of an instalment loan is a mortgage, but all sorts of loans are paid off in instalments. Payday loans have traditionally been paid back in one lump, around payday. But since these loans have become popular, many payday lenders have also started to offer loans that can be paid back over a number of months.
Most commonly, instalments are paid on the same day each month – typically on or just after your payday – but the instalments could also be paid weekly. If you get paid weekly, you might find it more helpful to make weekly repayments, but not all lenders will offer this facility. In theory, the more regularly you make repayments on a loan, the cheaper it works out overall, but if a lender charges extra for the privilege, then this may not hold true.
Instalment loans can be appealing, because spreading repayment over a longer term makes for smaller, more manageable repayments, but crucially it also means that your loan will cost significantly more overall.
Each instalment is made partly of the capital you owe, and partly of the interest. In your first instalments you’ll be paying a lot of interest, but towards the end of the loan you’ll be paying less in interest.
Traditional payday loans vs instalment payday loans
Traditional payday loans
- Borrow small amounts, typically £50-£250
- Repay in a single payment on your payday
- Loan terms of up to 30 days
- High interest rates
- High overall cost of credit
Instalment payday loans
- Borrow larger amounts, typically £200-£1,000
- Repay in smaller weekly/monthly instalments
- Loan terms of up to 12 months
- High interest rates
- Even higher overall cost of credit
Should I take out an instalment loan?
No matter what you need to borrow money for, it’s always a good idea to opt for the lowest rate available to you. If you can afford to pay a loan back as a lump sum, this will usually be a more suitable option, as the total cost of the loan will nearly always be lower. If you do have to spread the repayments, aim to keep the duration of the loan as short as possible, while ensuring it’s affordable for you.
High-cost, short-term credit is an incredibly expensive method of borrowing and should only be considered as a last resort. These loans may not solve your money problems, and they’re not a good idea for borrowing over longer periods, or for sustained borrowing. If there’s any way you can defer the expenditure, it’s definitely advisable.
When you take out an instalment loan through a payday lender, you can expect the total cost of the loan to be a lot higher than most other traditional sources of finance. So only apply for this type of loan if you can’t get another type, perhaps due to a poor credit score.
Am I eligible for an instalment loan?
Your eligibility for an instalment loan will vary from lender to lender, and will be based on a number of things, including the amount of money you want to borrow, the duration of the loan, your income and outgoings, and your credit score.
It’s typically a bit tougher to be approved for an instalment loan than it is for one that’s being repaid in a one-off payment , because (in a lender’s eyes, at least) there are more opportunities for you to miss payments with a longer loan.
Dos and don’ts for instalment loans
- Compare lenders to find the lowest overall cost
- Check your eligibility criteria before applying
- Match repayments to your paydays
- Choose as short a term length as you can afford
- Aim to repay your loan early
- Submit multiple applications in a short space of time
- Apply for a loan where you’ll struggle to meet the repayments
- Opt for an instalment loan if you can repay your balance in a lump sum
- Miss your repayments
Short-term, high-cost instalment loanJack had to borrow £500 to fix a problem with his car. Being on a low income, and with a bad credit rating, he decided to take out an instalment loan to fund the work.
His first step was to compare rates from multiple lenders, and, because he gets paid weekly, he also looked for a lender that would take repayments on a weekly basis. Once he found a suitable deal that he could comfortably afford to repay, he did a bit of research on his eligibility for the product. The lender he’d chosen offered a “soft search” facility (that didn’t impact his credit score) to see if he was likely to be approved. After being approved, he received the money within hours.
The lender used a continuous payment authority (CPA) to take repayments from his account on the same day of the week he was paid, so there was less danger of defaulting on the repayments. Jack cleared the debt after three months and got back on his feet, but overall it had cost him a huge £260 in interest to borrow just £500.
The bottom line
Payday loans are extremely expensive, and instalment payday loans even more so.
An instalment loan is going to be more comfortable for a lot of borrowers, especially when borrowing larger amounts of money. Many people find it easier making multiple small repayments than a single one. However, in the long-term, it’s more cost-effective to do the latter. So instalment loans should always be considered a Plan B. If you do go down this route, compare the best deals available and select the option most suited to you.
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