There are a wide range of short term personal loans available on the UK market. However, instalment loans have in recent times been mooted as a viable alternative to traditional payday loans; nowadays often referred to as 1 month or 30 day loans. Instalment loans are designed in principle to be repaid over a longer period than old-fashioned payday type products and by doing so they can make repayment much more manageable for borrowers.
However, instalment loans are not for all people and all circumstances and sometimes it can be better seeking out alternatives such as a guarantor loan or perhaps even an old-fashioned payday loan if circumstances dictate doing so. Hence, understanding the basic ins and outs of an instalment product is crucial if you are considering applying for one.
How Do They Work?
Instalment loans work by the borrower, upon acceptance being provided the money required in one go. As soon as the money is provided, the clock starts ticking and daily interest starts. the borrower will have a pre-arranged payment schedule with the lender whereby a number of repayment dates, usually 3-6 are agreed. On the agreed dates, the required instalment payments will be taken out of a dedicated account, often by way of a Continuous Payment Authority (CPA) arrangement.
The borrower will need to repay the agreed number of repayments over the agreed period. This will amount to a portion of the loan’s capital plus interest, with interest being accrued and calculated on a daily basis.
For example, a borrower may be accepted for an instalment loan over a period of 6 months. In this case, the agreement would include 6 repayment periods, usually around the day upon which the applicant receives their wages. Each payment goes towards clearing the loan and interest due. Assuming repayments are kept up to date, the borrower will have their debt cleared within the agreed timeframe.
What Are the Benefits of an Instalment Loan?
Instalment loans are a form of short term credit. This means that the interest rates charged on them, as in the case of a payday or other form of short term loan will be higher than high street loans. However, in most cases, the reason for taking out an instalment loan is the inability to get a loan through other channels due to poor credit or a lack of availability of other options for getting the much-needed money.
These loans do have a number of benefits however:
- More Manageable Repayments – Rather than having to clear the loan in full; capital plus interest, borrowers can pay their debt off in more manageable and spread out payments. This is often much more financially viable than having to pay potentially a few hundred or even thousand Pounds in one payment, allowing borrowers a little more breathing space in a financial sense, so long as they remain on top of their repayment schedule
- Quick Funding – Upon approval, most instalment lenders are able to fund loans within a matter of hours or even minutes. This is usually achieved through the lender using the Faster Payments Network, which allows for money to be transferred very quickly to approved borrowers. This can sometimes be done in as little as 3 minutes
- No Collateral – Instalment loans are a form of unsecured personal credit. This means that unlike loans such as logbook loans or even an everyday mortgage, there is no asset(s) needed to secure the loan against. Whilst this increases the risk to the lender and therefore the loan’s interest rate, it does mean that more people than not are able to reasonably apply for an instalment loan