Most direct lenders provide instalment loans to individuals to cover essential needs. Instalment loans are a financial facility that allows you to meet short and long-term life goals without depending only on savings.
It is an arrangement that helps you spread the purchase cost, installation cost, car repair, or bill payments into affordable, simple payments instead of paying the full amount upfront. It thus helps individuals to achieve their dreams without getting caught in the web of insufficient savings.
However, getting affordable instalment loans also depends on your credit score. One with a good credit score may get cheaper interest rates and better terms. At the same time, one with bad credit may struggle to qualify or fetch cheap quotes. Here, you need to be extra wise while taking an instalment loan for good or bad credit. The blog discusses it in detail.
What is an instalment loan?
When you borrow an amount from a loan provider, you usually repay it in parts via a series of regular payments. It could be monthly, weekly, or fortnightly. These payments that you make are known as instalments. It is where the loan gets its name from.
An instalment loan can be secured and unsecured in nature, depending on your needs and affordability. You generally pay the loan amount plus interest in the form of repayments on the loan. One can use an instalment loan for any valid purpose, like changing car seats, paying a credit card bill, buying a home, or even for business purposes.
How does an instalment loan work?
Here is how an instalment loan works:
- Step 1- You apply for a loan for any specific purpose, like paying utility bills
- Step 2- You get a quick quote reflecting the amount, the monthly payment, and the total you need to pay.
- Step 3- You must submit the documents for final assessment, and knowing the final amount you may qualify for
- Step 4- You get an agreement listing the interest, amount, terms, APR, monthly instalments and total payment amount.
- Step 5- You provide your consent after analysing the terms. Hence, shortly after that, you get the amount in your bank account.
- Step 6- You repay the amount you borrow according to the agreement in monthly or weekly payments until the loan term.
How much does an instalment loan cost?
The cost of an instalment loan depends on multiple factors. The general cost of instalment loans lies between 49%-1000%, depending on the loan provider, borrower’s affordability and the amount needed. It also depends on:
The annual percentage rate you get is based on your credit history. A higher APR signifies lower chances of loan repayment, and hence, it could prove costly.
For example, if you borrow £2000 for 24 months on an APR of 49.9%, you pay £123.64 monthly and £2967.43 in total on the loan. Understanding how APR is calculated may help you choose an affordable loan.
How to get instalment loans with a good credit score?
Before getting an instalment loan with a good credit score, make sure that the loan does not impact your credit rating. Here is how to get an instalment loan with a perfect credit profile:
Getting an instalment loan requires you to pass the credit assessment. Initial checks may not affect the credit score; however, a hard one does. Thus, instead of applying with multiple loan providers at once, use a loan calculator or pre-qualify. It may help you understand the chances of getting the loan approval and the amount you may qualify for. This does not affect the credit score.
According to the basic fact, loan repayments should make up just 30-35% of the monthly income. It could be less, but definitely not higher than this. The debt-to-income ratio reveals the total amount of debt against the monthly income.
The additional burden of payments reduces the credit utility, which may affect the budget. Check whether you can afford repayments if interest increases on a variable loan.
You may see the representative APR for which only 51% applicants qualify in general. However, the final APR that you get depends on your affordability. Thus, you should check the total repayment amount instead of comparing the APR.
With a good credit score, you are likely to get a low APR on instalment loans (5.7%-9.9%). However, there is no use if you pay more in loan fees and total. Compare basic loan fees like origination, early repayment charges, missed payment charges, etc. and choose the one charging the lowest.
How to get instalment loans with a bad credit score?
Your credit profile is generally risky with a bad credit score. Hence, you need to be extra conscious while applying for instalment loans. A poor credit history limits your options, and strict checks follow. Here is what to consider before getting an instalment loan for bad credit:
The amount you borrow directly impacts how much you pay in the end. It increases your interest liabilities as well. Thus, identify how much amount do you need and can comfortably pay in instalments.
Borrow money accordingly and get instant loan approval.
For example, if you need £1000 for repairing the bathroom leakage but can only afford to pay £700, borrow only £600. It gives you the flexibility of repaying the dues comfortably and avoiding debt.
You must explore the total cost of the loan, the amount repayable, the APR, and the monthly instalment amount. Fetch the one offering the loan with the lowest APR and total repayment amount. Check the hidden and surprise charges like pre-payment charges, loan penalties, and default charges before applying. It may make the loan costly.
Note: APR includes the interest charges also. Thus, comparing APRs is sufficient to get an affordable loan.
For example, you apply for car finance with bad credit, seeking guaranteed approval on the loan. You are confused between the APR 49.9% and 47% APR. Thus, choose the latter, i.e., the one offering 47% APR on the loan.
It eventually helps you pay low interest overall. However, skipping a payment may increase interest liabilities. You may not benefit from a low APR then.
Also, you may get guaranteed approval only if you can afford the monthly payments without affecting the basic budget.
Instalment loans are mainly about the repayment term or the loan repayment period that you choose. Generally, choosing a shorter term is ideal for most loans. It is because you may pay high monthly payments, but overall, you can save on interest costs.
Alternatively, choosing a longer repayment term increases interest costs and the overall cost to pay. Determine a comfortable repayment tenure by using a loan calculator. Analyse how much you can pay monthly without impacting other regular bills.
Bottom line
Thus, an instalment loan helps you borrow a sum of money and repay it in equal monthly or weekly instalments. It is the best way to achieve your dreams without depending on savings alone. Using and repaying an instalment loan for a long term improves your credit score. It helps you build a detailed payment history, which may prove beneficial for future credit applications.
Compare loan APR, interest and total repayment amount while considering an instalment loan for good and bad credit scores. It will help you fetch an affordable loan. Also, avoid making multiple loan applications, especially with bad credit. Instead, pre-qualify or use a loan calculator to know your basic loan costs.
Comments (0)