What is an instalment loan?


Instalment loans are repaid in a set of fixed amounts, rather than in a single payment at the end of the loan term. Typically, an instalment loan is a short-term loan that allows borrowers to borrow money over a period that suits them.


A great example of an instalment loan is a mortgage on a house; however, in reality, all loans are repaid in instalments. Payday loans have traditionally been repaid in one sum, around payday as the name implies. Since these loans have become popular, several payday lenders have begun to offer loans that can be paid back over some months.

Each instalment is made partially of the capital borrowers owe, and partly of the interest (APR) accrued. In the first instalments the majority of the repayment will be repaying the interest, but towards the end of the loan, it will be more the capital that was initially borrowed.

What are the advantages of an instalment loan?

One of the key benefits of instalment loans is that they offer flexible repayment periods.  

Rather than borrowers repaying the sum owed in one amount, they can choose to repay over instalments making the borrowed amount more manageable to repay.

Usually, these instalments are paid on the same day each month, generally around or just after a borrowers payday. Some lenders offer weekly repayments so should you get paid on a weekly basis, then this option is better suited for those paid weekly. However, not all lenders offer multiple repayment options. In theory, the more regularly borrowers make repayments on their loan, the cheaper it works out in the long-term, but only if a lender offers this.

Instalment loans can be appealing because spreading repayments over the longer term creates smaller, more manageable repayments, making it easier to budget. However, it also means that the loan will cost significantly more overall.

Am I eligible for an instalment loan?

Borrower’s eligibility for an instalment loan will vary with each lender and will be determined on a range of factors, including:

  • the amount of money the borrower wishes to borrow
  • the duration of the loan
  • the borrower’s income and outgoings
  • their credit score

Should I take out an instalment loan?

No matter when people borrow money, it is always a safe idea to opt for the lowest rate available to them. If they can afford to pay a loan back as a lump sum, this will usually be a cheaper option and less likely for the borrower to get further into debt.

Instalment loans are expensive and may not solve money problems, and they are certainly not ideal for borrowing long-term. However, they can help to budget for an increased expenditure over a period, for example, during the Christmas period.

When borrowers take out an instalment loan through a direct lender, they can expect the total cost of their loan to be higher than other traditional sources of finance available on the high street. Payday lenders though are more flexible in offering credit to those with adverse credit scores.

What if I have bad credit? Will lenders offer me an instalment loan?

The most critical factor for most loans is a good credit score, but for whatever reason, not every borrower has this. There are trustworthy lenders, like Peachy, who are able to assess a borrowers application despite their poor credit score.

What matters most is a borrower’s ability to repay. If a borrower has a stable income and a UK bank account, a bad credit lender may be able to offer credit terms that a traditional bank or credit card may overlook. Always check the eligibility criteria first before applying for an instalment loan.

Dos and don’ts when applying for instalment loans

When you are considering applying for an instalment loan, make sure you do the following:

  • Check the eligibility criteria before applying
  • Compare different lenders to find the cheapest loan
  • Aim always to repay your loan on time, or earlier
  • Choose a short term loan when possible
  • Keep repayments to around payday

Make sure you DON’T do any of the below when applying:

  • Apply for multiple loans simultaneously
  • Knowingly apply for a loan where you’ll struggle to meet the repayments
  • Opt for an instalment loan if you can repay your balance in a one lump sum
  • Think you can miss any repayments – you can’t!

Please note: As with all credit applications only apply if you plan to keep up the repayments on time and can afford to pay the loan back in full. Failure to do so will be recorded on your credit history and cause you to sink into further debt.