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Installment Loans: The Complete Guide

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Have you ever had installment loans? Or have you considered them? They can provide an excellent financial reprieve for a borrower who is struggling to make ends meet or who has an expense coming up that they need to cover. But do you know enough about them to be able to commit to this financing solution? Keep reading to find out all about the terms of this type of lending, the advantage and disadvantages, and how to figure out whether or not it's the appropriate choice for your financial needs.

What Are Installment Loans?

As you can guess by the name, installment loans are loans you can repay in installments. What that means is that you borrow an amount of money and make a payment plan with the lender. You agree on repaying the loan in a fixed number of payments, usually of a fixed value, over a certain amount of time.

For example, let's say you will be paying £200 every month for 12 months. You will continue to pay these installments on the dates agreed upon until you pay off the entire amount you've borrowed, as well as any amount of interest your loan has incurred. The longer it takes to pay off the loan, the more you will be paying in interest.

How Do Installment Loans Work?

Installment loans work like any other loan, and in fact, are the typical type of loan you will find offered by banks or high street lending companies. A type of loan that breaks this mold is the traditional payday loan, which is offered in relatively small amounts and is extended over a month-long period, or until "payday", at which point, the borrower must repay the entire amount in one go, including interest.

Applying for installment loans is simple and doesn't require much effort; simply fill in the form online, if you're applying at home, on your computer, or go in to any lender on the high street and follow their application process. A lot of lenders will be able to at least tell you whether or not you are pre-approved almost instantly, or within 10 minutes.

How much can you get?

In terms of amounts, how much you can get will, of course, vary significantly and depend on the lender itself, as well as your needs, expectations, and financial situation. An excellent credit score and financial track record will enable you to borrow a higher amount, while a poor credit score, unemployment, or even self-employments can all be deterrents. Some places only offer up to £3000, others go up to £15,000 - make sure to shop around first and see what different lenders can offer you and at what cost.

For how long do you repay?

Like the loan amounts, the repayment periods will differ. A small unsecured loan of £500 may be repaid in two months, for example, while higher amounts (think several thousands) will, understandably, be repaid over a longer period of time, of 12 to 36 months. Like the amount you can borrow, your credit score can affect the length of your loan. A poor credit rating can limit your repayment period, which will result in higher installments to pay, and almost certainly, a higher interest rate. Secured loans typically come with longer repayment terms because of the high amount, but also because the borrower provides collateral to secure the loan.

Who can get installment loans?

Payday loans in installments are accessible to pretty much anyone, regardless of financial situation or social status. While it is easier for some to get approved than others, everyone should be able to get one. Limitations will come up, however, because of things like bad credit scores, low income, or an uncertain employment situation.

Who offers installment loans?

The good news is that plenty of places offer installment loans. You can opt for a loan from a traditional financial institution, like a bank, if your credit rating is high and you are confident that you will easily get approved. Or, you can search online or on the high street for alternative lending companies that can offer you payday loans for bad credit, a short term loan with no credit check, or other such options tailored for your specific personal needs. Just remember not to take the first offer you receive and to thoroughly vet the lender before doing business with them.

Can installment loans be paid off early?

When picking out a lender, be sure to choose one that gives you the option of repaying the loan early with minimal hassle. Sometimes, it happens that you get an unexpected amount of money from somewhere and are able to repay the loan early. Not only does that reduce your debt anxiety and eliminates the risk of becoming unable to pay later, but it can also reduce the amount you owe, as well, because you're not paying the extra interest. Be aware, however, that a lot of places have a one-time charge for paying early; it's usually equivalent to a percentage of the interest rate.

Don't forget to check with the Financial Conduct Authority (FCA) to see if the lending company is authorised and legally allowed to operate.

Advantages Of Installment Loans

Before you make up your mind about committing to any financing solution, it's a good idea to take a look at general pros and cons and weigh them against each other. First, let's see what benefits an installment loan can bring you.

You can get them quickly and easily

Generally speaking, it's quite simple to get payday loans to be repaid in installments. One of the major benefits is that you can access them almost anywhere, regardless of your preferred manner of action. If you're the kind of person who wants to do things in person, you can just walk into any bank and see what they can offer you. However, more and more people are solving these things online nowadays, and you can find lending companies offering payday loans promptly. In addition, the minimum requirements are usually not difficult to meet, and you may even be able to find out instantly if you were approved or not!

You can repay the loan in an affordable way

It's absolutely crucial that when you take out a loan, it should be easy and affordable to repay. A loan that you are able to pay in instalments is the ideal financing solution, because it makes it so much easier to fit into your normal budget. Of course, that will always depend on how much you're borrowing and how much you spend, in general, but rest assured that any lender worth their salt will perform an affordability check to make sure that you are able to repay this loan comfortably, without being pushed further into debt.

You can get them with bad credit

A poor credit rating can put you in a very unfortunate situation, as it is often a limiting factor when it comes to getting loans or credit cards. Bad credit attracts a higher interest rate, lower borrowing limits, and shorter repayment terms, or, in the worst-case scenario, just flat-out rejection. That is why it's so advantageous that payday loans with no credit check or payday loans with bad credit exist; they enable everyone to borrow money, even if their credit is not the best. Either the lender does not perform a credit check at all, or they simply accommodate all credit scores, high and low.

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Disadvantages Of Installment Loans

On the other side of the coin, there are the drawbacks. What is less than ideal with installment loans? What could put you off them, or prompt you to look for better deals? Here are some of the negatives you might want to consider before committing to installment loans.

The amounts are not very high

Now, installment loans can be excellent financing solutions, but this does depend on what sort of expense you are looking to cover. For example, if you have a very expensive purchase coming up, or you're looking to finance a house or anything like that, this will not come in handy, as the amounts are too low. The average amount offered is £1000, with some exceptions going up to several thousands, but that's only in very special cases. If you need money quickly for something short-term, yes, opt or a payday loan, but if you need anything more, you are better off looking for a suitable alternative.

The interest rate can be quite high

The aspect we cannot ignore about installment loans and must address is that the interest rate is not low. In fact, it can be prohibitively high for some borrowers. Depending on the APR rate, you can even end up paying twice as much as you borrowed in interest charges alone! That can put off a lot of people or make it so they cannot actually afford a loan, or simply are not willing to pay that amount. Of course, the sheer convenience of being able to repay in installments can make the interest rate worth it, but if it's not, you may want to look at other options.

The repayment period is fairly short

While the repayment period is set according to the amount you borrow, you won't have a lot of time to pay the loan off. You're on a fairly strict repayment schedule and you'd better be sure that you have enough money to cover all of the installments. This won't be a problem if you don't have affordability issues, but for some borrowers, it can become too much, too soon. Some of them are even pushed to get other loans to cover for the initial loan, which we will address in a following section.

If a lender does not perform an affordability check or offers you a loan that you know you cannot afford, walk away. That lender does not have your best interest in mind.

How Installment Loans Affect Credit Score

You will know by now that your credit score is vastly important when it comes to all things financial. Whether you're looking to get a loan, a credit card, or even just to rent a house, your credit score will come into play some way or another. How closely tied is it to installment loans, and can one affect the other?

Why is your credit score so important?

Let's start with the basics and explain some things about credit ratings. Your credit score is basically a numeric reflection of your financial activity over the course of your life. You get points added for being responsible, and points deducted for being careless. The problem is that everyone will want to take a look at this score in order to be able to assess what kind of borrower you are. In absence of a crystal ball, no lender can predict whether you will pay your loan back or not, no matter how trustworthy you seem or how good your intentions are.

That is why it is essential to keep a good track record and do whatever you can not to slip up, so your credit rating can be the best it can be. And don't worry - even if your credit is poor, that can always be rectified by actively making an effort to improve your rating. Keep reading to see what you can do.

How can I improve my score?

It's good to know that bad credit is not the end of the world - I can practically hear your sigh of relief. But even though it is still possible to have access to loans with a poor credit rating, you should definitely do your best to improve your score. Here are some of the things you can do to help it out:

  1. Pay off any outstanding debt

The no. 1 thing to keep in mind is that you need to pay off any debt you may have. Yes, that includes old phone bills you never bothered to cover, any debt that went to collections, or loans you've all but defaulted on. Scrubbing your record clean is a great place to start.

  1. Reduce the number of credit cards

We all have multiple credit cards and store cards and whatnot, but a) you don't need them, and b) they severely damage your credit. Why? Because more credit cards translate to more opportunities to create debt that you will never repay. Did you know that it takes a person 26 years to pay an average credit card debt, making minimum payments? The Money Charity has the statistics on that.

  1. Make payments on time

I've said it several times, but it bears repeating: pay your bills on time. That includes everything, from everyday household bills, like rent or tax, to loan installments. The easiest way to make sure you stay on track and don't forget or accidentally miss a payment is to set up direct debits. Bonus - your bank might even offer you some perks for that.

Will installment loans help my credit?

Can installment loans improve credit ratings? Can going into debt help increase your score, instead of hurting it? As a matter of fact, yes, it can. In fact, did you know that a lot of people use loans as a very clever means of improving their credit score? You see, when you pay a loan off in an exemplary way (diligently, on time, without delays or skipped payments, etc.) you demonstrate financial responsibility. You've taken out a loan, paid it off, and no issues were created. That counts as a point in your favour. It can be a very strategic move, and as long as you know you can pay if off, there is no reason why you shouldn't be able to get an installment loan to help your credit.

Will installment loans hurt my credit?

Ok, but what about the points we were making earlier about how debt affects your score negatively? An installment loan can, certainly, negatively impact your rating, if you do a very bad job keeping up with payments and generally staying on top of it. A lender does not want to hear any excuses, nor do they appreciate it when you dodge their calls after you fail to make a repayment on time. Irresponsible behavior will definitely attract a negative score.

Another thing you should look out for is rejection. Do not apply to loans if you are not reasonably certain you will get approved, as rejection will impact your rating negatively. Use a soft search tool to get an idea where you stand before sending in applications.

Installment Loans vs Other Loans

Ok, but are payday loans that you can repay in installments the be all end all of loans? How do they compare to similar alternatives that you may want to explore? Let's take a look at some other options.

Secured loans

Secured loans are a great option if you are concerned with the amount of money you can receive with installment loans and the maximum limit is too low for your needs. A secured loan solves that problem, as well as that of the short repayment term, because this kind of loan offers a much longer repayment term, extending over several years. The downside is that you have to own an asset that you need to put up as collateral. Moreover, should you become unable to repay further down the line, you can end up losing the asset to the lender.

Peer to peer loans

If you don't want to go through banks or lending companies, there is always the option of borrowing from a peer. There are online communities for people willing to lend money, where you can go and make a request and people can choose to extend an offer for a loan, or not. Please be aware that your credit score will still be of interest, as lenders will most likely want to make sure you can reliably pay off the loan. However, even so, this alternative may offer more flexibility than a more traditional option that you may have chosen to forgo.

Family loans

Continuing along the lines of non-traditional lending, borrowing money from family is, of course, an option most people probably consider. As with any other solution, there are advantages and disadvantages to consider. While they may not ask for a credit score or interest, it is very easy for relationships to turn sour when financial matters are involved. The terms of the loan would have to be very clear (and hopefully legalised) before you commit to a loan like this.

Credit cards

Depending on how much you are looking to borrow, credit cards can actually be a viable alternative. You can get a fair amount, but this hinges on you having an excellent credit rating to show the bank. One drawback you have to be aware of is that interest rates are not that much better with credit cards than they are with installment loans. That is, of course, unless you have a 0% interest credit card and can commit to repaying the money within a year.

All in all, installment loans are an option that a lot of people consider when they run into money problems, because they offer so many convenient advantages for most borrowers. The fact that you can repay in instalments makes it more affordable and if you are not looking to cover a massive expense, it can be the right option for you. Be careful, however, of the drawbacks that come with this option, such as high interest rates.

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