An instalment loan is a form of short term credit that allows you to repay the borrowed money over fixed monthly instalments. Instalment loans are usually used by people who are planning to make a big ticket purchase. The ease of fixed monthly repayments takes the financial pressure off their shoulders. Lenders set up an interest rate on your loan, based on your financial statement. Some major factors that are taken into account are your income, expenses, debt-to-income ratio, credit score and profile, loan amount, term, and your current employment status. If you prove your creditworthiness and affordability, you may be able to borrow up to £35,000.
In this article, we’ve thrown light on some of the most commonly asked questions about Instalment loans. Read on to get clarity on how this product actually work.
How does an instalment loan work?
The basic idea of an instalment loan is to help the borrower pay through easy monthly instalments. You start by filling an online loan application form with personal details such as your address, employment status, income, expenses, how are you planning to spend the funds if you receive (purpose of the loan), and the loan term.
Once you apply, lenders will assess your loan application and they will inform you of their decision after a careful assessment. Your creditworthiness will be reviewed to determine how much money you’ll be lent and at what terms.
Now, when your instalment loan application gets approved, you’ll receive the funds from the lender in your bank account. When you borrow an instalment loan, you agree to repay it in fixed monthly repayments until you pay off the entire amount, along with the interest. You have the liberty to choose your repayment period. But choose wisely, Taking your affordability into into account.
What are some examples of instalment loans?
There are mainly two types of instalment loans – secured and unsecured. To get a secured loan, you will need to use an asset as collateral, such as your car or property. Now, in the event of a default, the lender will recoup their loss by repossessing your asset. An unsecured loan, on the contrary, doesn’t require any collateral security. However, you need a decent credit history to qualify for an unsecured loan.
Here are some examples of an instalment loan:
- Personal loans
These are instalment loans that you can repay over time in fixed or variable monthly payments. Your repayment schedule and amount will depend on the type of interest that you and the lender have mutually agreed to. You can use a personal loan to solve a variety of purposes. Most people use personal loans to finance a wedding, or to fund their home improvement project. As this is an unsecured form of borrowing, the rate of interest is comparatively higher than a secured loan.
When you purchase a new property, you take a mortgage to pay the price. Now, you pay off the mortgage over fixed monthly instalments. Since you are repaying the debt in parts, a mortgage can also be termed as an instalment loan. If you fail to repay your monthly mortgage payments, the lender will seize and repossess your property. They may sell it off to recuperate the loss.
What are the advantages of an instalment loan?
There are a lot of advantages of choosing an instalment loan but one tops the list – flexible repayment periods. Usually, you will have to pay these instalments on the same day each month. If you have taken a small personal loan, and you can manage to make payments weekly, you should ask your lender if they have such a provision.
Instalment loans are flexible and can easily be tailored to suit your needs, in terms of the loan amount and the tenure of the loan. You can choose a repayment period to suit your affordability. Instalment loans come at a significantly lower interest rate than forms of revolving credit, such as credit cards.
How instalment loans help your credit score?
All your transactions are recorded on your credit profile. When you borrow a loan and make repayments as per loan obligations, the lender sends this data to credit bureaus. Credit bureaus regularly update your credit profile according to the information they receive from the lender.
Hence, ensure that you repay your instalment loan on time and in full to boost your credit score. You can also benefit from the “credit mix”. If your credit report has a variety of financial products listed on it, and you’ve made regular repayments, it can certainly enhance your credit score.
However, if you fail to repay the loan, the lender might get a CCJ issued in your name. This will not only damage your credit score, but will hamper you chances of securing credit in the future.