5 Common Types Of Instalment Loans And Their Best Uses

Known for building and doing up your credit score, instalment loans are sought after to fund large expenses. The size of the loan is big enough to spread the repayment term over a period of at least six months; credit builder loans are one of them.

Interest rates can be fixed and variable depending on the type of loan you take out. Almost all instalment loans are amortised, meaning monthly payments will go towards both the principal and the interest. These loans tend to be more affordable than credit card rates, even if you are looking to apply for bad credit instalment loans in the UK.

5 common types of instalment loans

Here are the most common types of instalment loans and their uses:

  • Personal loans

Personal loans, also known as unsecured loans because they are not subject to collateral, come in handy for both planned and unforeseen expenses and are available from banks, direct lenders and credit unions. These loans are paid back over a period of months that can be up to 18 months and sometimes more depending on the borrowing sum.

Every month you will be under an obligation to pay down a fixed sum of money until the complete settlement of your loan. Since these loans are not subject to collateral, you are likely to get higher interest rates. They could be even higher if your credit score is not up to snuff.

Personal loans from a direct lender are the perfect choice if you need money for:

  • Unforeseen expenses like medical bills, home repairs
  • Consolidating high-interest debts
  • Buying big-ticket items like vacation, wedding and home improvement projects

Personal loans can be used for any type of expenses except business ones.

  • Car loans

Want to purchase a new car? Auto loans can help you finance your car when you do not have to pay its market value outright. The repayment length of these loans is usually double the term of personal loans. As soon as you get funds, you will be required to make fixed payments every month until the end of the loan agreement. Your lender will want at least 10% of the sticker price of your car upfront. In case of a bad credit history, you should be sought to pay a higher sum.

These loans are secured as the car you finance will back them. You will be given carte blanche to use your car the way you want; no restrictions related to mileage and all, but your lender will have the upper hand as you will own your car only after the closing of your loan. In case you default, your lender will repossess your car to liquidate it to cover the outstanding balance.

  • Student loans

Student loans are aimed at students who need money to fund their education, accommodation and related expenses and are available from the SLC (Student Loan Company) and online lenders. Loans from the SLC are government-backed, and hence, they are far more affordable than student loans from private lenders.

Interest rates are very low, and you will not start repaying the debt unless you start making money. You will pay down an instalment only when you are earning above and beyond the threshold income. There are four types of threshold plans for graduate students and one for postgraduate students. You will pay 9% of your income over the threshold for a graduate loan plan and 6% of your income over the threshold for a postgraduate loan plan.

However, the scenario is absolutely different when you take out these loans from direct lenders. You must have some income to qualify for these loans, and you will be required to make payments as soon as you get money. The size of the instalment will be determined based on the borrowing amount and your income. You cannot stop payments in case you lose your income. Otherwise, interest penalties will quickly add up to the cost of the loan, and you will lose your credit points.

  • Buy now, pay later (BNPL)

BNPL schemes are also a type of instalment loan. These schemes are available from mostly retailers. If you want to buy something and you do not have enough money to pay outright, you can sign up for these schemes. Though you can use your credit card instead, you will be required to settle the bill in full within the grace period.

On the contrary, you will make a fixed instalment over time under a BNPL scheme. However, interest rates and fees are also charged when you sign up for BNPL schemes. Some companies will run a hard credit check, while others will not. At the time of signing up for these loans, you should carefully analyse your repaying capacity as, most of the time, you tend to finance more than you can afford to repay.

  • Mortgages

If you want to get a foot on the property ladder, you will need a first-time borrower mortgage. However, there are other types of mortgages as well, such as commercial and buy-to-let mortgages. All types of mortgages are instalment loans because payments are made over an extended period, but they remain fixed only for a limited time period.

Once that time expires, you are put on a standard variable rate. Interest rates will change as the base rate by the Bank of England changes. When it goes up, the monthly instalment also increases and vice-versa.

You will be required to pay down a deposit that is at least 10% for first-time borrower mortgages and 20% for commercial and buy-to-let mortgages. In case of a bad credit rating, your lender might expect you to put down a higher deposit.

The bottom line

The aforementioned instalment loans have a particular use. Make sure you understand how they work and impact your credit score and finances. These loans can help build and improve your credit history if paid on time and take a toll on your credit score if payments are missed.

Roscoe Tanner is the Editor-in-Chief, leading a large team of writers at LoansForever. He has expertise in writing for various borrowing options like personal loans, long-term and short-term loans, unemployed loans and many more. Roscoe joined LoansForever in 2015 but previously worked with many reputed loan companies. He performs the major role as the editor, covering key aspects of loans and finance. Roscoe Tanner wants to serve at large in the progress of the company and to present a modern alternative to the traditional financial industry in the UK. He is a Certified Financial Planner and has a god-gift of connecting with people through his valuable suggestions and writings. His expertise as a writer and editor in the finance industry is based on his education qualification. Roscoe has done a Master of Business Administration (MBA) in Finance.

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