It can definitely be challenging to get approved for a loan if you have bad credit.
However, there are many specialist lenders you can turn to who may provide you with something known as an instalment loan.
With an instalment loan, you will be able to repay the amount you borrowed over a certain period of time (typically six months).
I’ll be discussing today how instalment loans work and what things you should keep in mind when applying for one.
What is an Instalment Loan and How does it Work?
Most instalment loans work in pretty much the same way as any regular loan would.
You submit your application and wait to see if the lender approves you for the loan or not.
When it comes to instalment loans, your credit score doesn’t matter as much. Most lenders will look at your ability to make payments throughout the agreed-upon duration.
As long as they’re satisfied that you’ll be able to comfortably make your payments, your loan should be approved.
As the name suggests, when it comes to instalment loans, your repayment doesn’t occur as one lump sum.
Instead, your payments are spread out over the course of several months. The exact duration depends on your agreement as well as how much you borrowed. If you fail to make your payments in instalments, this will result in late charges being added on to the debt you already have.
If you fail to make payments towards your loan even after receiving warnings, then your lender may hire a debt collection agency.
Failing to make payments towards the debt collection agency will eventually result in you having a County Court Judgment (CCJ) taken out against you.
Instalment loans are great for individuals who know that they won’t be able to pay back the complete total amount by their next paycheck but still need funds for an emergency purchase.
There are certain aspects of instalment loans which you should definitely be aware of before you apply for one. These are:
The amount of money you are able to borrow with instalment loans depends on a number of factors such as the lender as well as your existing financial circumstances. You’ll typically be able to borrow more with an instalment loan that you would with a short-term loan.
Some lenders may have tier systems set up where they would want you to work up to a certain tier before you are able to borrow the maximum amount of money that they offer.
Most lenders offer instalment loans that can have a duration of as much as 60 months. You may even be able to find lenders that provide even longer-term loans that last up to 120 months.
Mortgage loans can also be defined as instalment loans. When it comes to mortgage loans, you have to make a repayment each month for anywhere between 20 to 30 years.
It’s important to determine your loan duration carefully. Having a long duration where you make a small repayment each month may seem like a good idea but in reality, you’ll be paying a lot more in interest charges.
Application Processing Time
It’s important for you to be aware of the fact that some lenders take longer to process your loan application than others.
If you need money for an emergency or for a purchase that is time-sensitive, you may want to opt for a lender that can process your application relatively quickly.
There do exist lenders that can process your application within minutes and have the money transferred to your bank account within the same day.
Fees, Rates and Charges
This is something that’s fairly obvious but it still needs to be stated: different lenders will have different charges, fees and rates of interest.
Thus, it’s a good idea when looking for short-term loans that you look at many different lenders in order to assess what they offer so you can make the best decision for yourself.
The important thing to note is that you should be looking at what different lenders are offering but in the end, you should send an application to only one lender which you select.
Sending applications to many different lenders is not a good idea as this can result in your credit score going down quite dramatically.
This happens because when you apply to a lender, they look up your credit history. This credit check gets mentioned in your credit file.
Too many of these credit checks in your credit file can reflect badly on lenders that are assessing your application.
Finally, look for a lender that provides you with the best interest rate and has the least amount of hidden/additional charges.
What Are Some Pros and Cons of Instalment Loans?
As with most different types of loans, instalment loans also have their own set of advantages and drawbacks.
- You’ll have plenty of lenders to choose from. Many different lenders offer instalment loans so you can pick and choose the one that best suits your needs. Be sure to compare rates of interest and other fees of different lenders online before you make your decision.
- You won’t have to worry about paying back your loan in full as you do with most short-term loans. Making a small repayment each month can be much more affordable and manageable.
- Lenders don’t turn you away simply because you have a bad credit score. While a good credit score is definitely a plus, a bad one won’t mean it’s impossible for you to get an instalment loan.
- You will be able to get your money fairly quickly. If you apply for the loan in person, it will be transferred to your account as soon your loan gets approved. If you apply for the instalment loan online, you’ll get your money on the next business day.
- Any instalment loan you opt for will typically have a higher interest rate. Having a bad credit score on top of that will further cause the interest rates that lenders offer to you to rise.
- You’ll have to manage your budget carefully for a much longer duration than if it were just a one-time repayment.
- There are many shady lenders online who take advantage of people in vulnerable situations that have bad credit. Be sure to only apply to lenders that are authorised and regulated by the Financial Conduct Authority.
Things to Keep in Mind
Beware of loan sharks who operate illegally and may try to take advantage of your circumstances. They will normally charge you a ridiculously high interest rate and they may even threaten you with violence if you are unable to pay back the loan.
Always make sure that the lender you are taking out a loan from is authorised and regulated by the Financial Conduct Authority so that you know that your rights are protected.
Before accepting any loan contract, be sure to go through it thoroughly to make sure you’re aware of all the charges involved.
When making a budget for the instalment loan, be sure to take the interest rate into account.
If you’re having trouble determining your fees and budget, you can contact an independent debt charity such as StepChange for further advice.
Repayment to an instalment loan is much more manageable and easier than that of typical one-time payment loans.
Just make sure to assess your finances thoroughly to ensure you’ll be able to make the agreed-upon repayment each month.