What are instalment loans?
Instalment loans are any type of loan that you pay back in small amounts over a period of time, with added interest.
Payments are fixed and usually made monthly, although you may come across weekly instalment loans if you need to borrow smaller amounts of money.
Typical types of instalment loans include:
- Personal instalment loans
- Secured instalment loans
- Bad credit instalment loans
How do instalment loans work?
With an instalment loan, you can borrow a lump sum and repay it in regular instalments. Each payment is made up of the money you borrowed plus interest.
You'll need to make regular payments until you've fully paid off the borrowed money. It’s important to remember that the total cost of the loan will be more than what you borrowed because you'll be charged interest by the loan provider – that's the fee for borrowing the money.
Before you receive the cash in your account, you'll have to sign a credit agreement, which will inform you of:
- the total cost of your loan
- the APR (annual percentage rate)
- the length of your borrowing term
- your monthly instalment amount
Once you have the money in your account, you'll need to make your repayments on time and in full. If you cannot do this, you may incur penalties and damage your credit score, which could lead to you finding it difficult to get credit in the future.
What can I use an instalment loan for?
You can use a personal instalment loan in the same way as you would a personal loan; you can spend it on anything you want once the funds are in your account.
Reasons people may use an instalment loan include:
- to buy or repair a car
- to pay for a family holiday or event
- to pay for home improvements
- to solve a cash flow problem
Instalment loans can be costly, but they can help if you need to spread the cost of a large purchase or deal with unexpected costs.
How long will I have to pay back an instalment loan?
It depends on the loan term in your credit agreement, but typically lenders offer instalments loans between three - 12 months for loans under £1,000 and up to five years for loans of £10,000 or more.
The longer your borrowing term, the more your loan will cost, so weigh up how much you can afford to repay each month and pay it back as soon as possible.
An online loan calculator can help you to work out how much your loan will cost you per month based on the borrowing term.
How much does an instalment loan cost?
The cost of a personal instalment loan depends on several factors based on your borrowing needs and financial circumstances.
The main ones are:
- The interest rate
- The amount you borrow
- The borrowing term
The annual percentage rate (APR) offered to you will be based on your credit history and how likely you are to repay the loan. Instalment loans are easier to get than some other loans, but interest rates are often high, so use a loan calculator to see how much a loan will cost you before you apply.
Where can I get an instalment loan?
Most lenders offer instalment loans online. If you're looking for an instalment loan, you'll find a wide range of direct lenders using a comparison site like ours.
A comparison site is often a good place to start your search because you can use filters to narrow down results and sort by the best interest rates.
We only work with an extensive panel of specialist lenders to save you time making multiple applications and to give you more choice.
What are the pros and cons of instalment loans?
An instalment loan can help finance a large purchase, solve a cash flow problem or pay for an unforeseen expense. However, there are also downsides to getting an instalment loan online because you’ll have to pay back more than what you borrowed, so check the total loan cost and weigh up the costs and benefits of borrowing before you apply.
- Simple online application
- Funds available quickly if you're approved
- Manageable, fixed, regular repayments
- Bad credit applicants may be accepted
- Allows you to budget monthly outgoings
- Higher than normal interest rates
- May have fees for early repayment of the loan
- Cheaper loan options may be available
- Steep penalties for late or missed payments
- You'll damage your credit report if you regularly miss payments or default on a loan
Are there any alternatives to instalment loans?
Credit cards
A type of payment card which allows you to use borrowed money to pay for goods and services online and in stores. You can pay off the amount you owe in full each month or make smaller repayments with added interest. Sometimes these cards are available with introductory rates for people with a good credit score.
Buy Now Pay Later
A point-of-purchase credit option available from most online retailers and some travel agents. The credit is often interest-free for a time, and you repay it in pre-set instalments. It can be ideal for spreading the cost of online shopping but less flexible than an instalment loan.
Guarantor loans
A type of unsecured loan where someone else guarantees that the loan repayments will be made if you can’t make your repayments. You'll both need to be credit checked and provide financial information to support the application. They can be cheaper than other bad credit options, but the application process can take longer.
Credit union loans
A low cost loan from a credit union - available if you belong to a workplace or community with a credit union. This type of loan can have lower rates of interest and costs less than many other alternatives. The drawback is you'll need a fair credit rating, and the loan may take longer to arrange.
Instalment loan FAQs
Instalment loans are available for those with a bad credit score, but you'll pay higher interest rates, so your loan may be more expensive and you might find it harder to borrow the amount you need.
Even if you have a bad credit score, there are lenders who’ll consider your application. Eligibility searches carry out a soft credit check so you know where you stand before making an application with a lender. A soft credit check is when only you can see it on your credit report.
Each lender will have separate eligibility criteria, but all lenders will need you to prove your identity and loan eligibility.
Documents you may need to provide include:
- Proof of residence, such as a utility bull, mortgage statement or rent agreement
- Proof of your right to live and work in the UK
- Proof of income, such as payslips, 12 months worth of bank statements or evidence of benefits you recieve
- Employer details or evidence of self-employment, such as tax records
You will need a bank account with the facility to set up a direct debit for your monthly or weekly instalments.
Some lenders will pre-approve instalment loan applications with a soft credit check, which allows banks, brokers and direct lenders to check your creditworthiness without affecting your credit rating. You will only have a hard credit check if you choose to complete an application.
However, if you make several loan applications in a short time period, it could affect your credit score, so it’s best to use a comparison site such as ours instead of applying directly with multiple lenders for your instalment loan. We can help you find the providers most likely to lend to you.
If you repay your instalment loan back on time and in full each month, having an instalment loan can even help to repair or build your score and improve your credit rating.
If you miss a payment on your monthly or weekly instalment loan, you risk additional costs and a record of the missing payment will be left on your credit report. This means it may be harder to secure credit in the future with other lenders.
Your lender will likely charge you a missed or late payment penalty too. If you can afford to make the payment, make it as soon as possible.
If you regularly miss payments, it will impact your credit score which will make it harder and or more expensive for you to borrow in the future.