Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk.
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.
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 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.
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 is usually 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 loan duration 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 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 loan’s total cost to be much 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.
Your eligibility for an instalment loan varies from lender to lender and is based on a number of things, including the amount of money you want to borrow, the duration of the loan, your income, your expenses and your credit score.
It’s typically a bit tougher to be approved for an instalment loan than it is for one repaid in a one-off payment because (in a lender’s eyes, at least) there are more opportunities to miss payments with a longer loan.
Jack 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 researched 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 3 months and got back on his feet, but it had cost him a huge £260 in interest to borrow just £500.
* This is a fictional, but realistic, example.
A CPA is a recurring payment in which you give a company permission to withdraw money from your account on a regular basis.
CPAs differ from direct debits because they give the company being paid the ability to withdraw money from your account whenever it wants and take payments of different amounts without consulting you. Most payday loan companies use CPAs to collect your repayments, although you can cancel this at any point by consulting with your bank or provider.
Payday loans are extremely expensive, and instalment payday loans are even more so.
An instalment loan will be more comfortable for many borrowers, especially when borrowing larger amounts. Many people find it easier to make multiple small repayments than a single one. However, it’s more cost-effective over the long term to do the latter. So, instalment loans should always be considered a Plan B. If you go down this route, compare the best deals available and select the option most suited to you.
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