Instalment loans are a cross between payday loans and personal loans, giving you the chance to borrow money quickly and repay it over a longer time-frame than normally possible with a normal payday loan.
We take a close look at and whether you should ever consider using them.
What are instalment loans?
Instalment loans are short term loans that last for between 3-12 months. You repay the loan in several monthly instalments, rather than clearing it with a single payment like a payday loan.
You can typically borrow anywhere between £50-£2,000 depending on your personal circumstances, credit history and income.
Are instalment loans expensive?
Yes, like payday loans instalment loans lenders often charge interest rates well over 1,000%.
Because instalment loans are spread over a longer period of time you can often end up repaying more than double what you originally borrowed.
Many direct lenders will also offer bad credit instalment loans if you have a poor credit history or are on a low income but expect to pay even more for the privilege.
How are instalment loans different to personal loans?
In some ways instalment loans are similar to short term personal loans but there are two main differences, the cost and the length of time you have to repay your borrowing.
Most unsecured personal loans last for between 1-5 years, while instalment loans are usually over a short time period of 3-12 months.
When you compare standard personal loans, even the most expensive have representative APRs of under 100% APR which is far less than payday instalment loans.
Applying for an instalment loan may also have an adverse effect on your credit report, some mortgage lenders will turn down an application if you've applied for a payday loan in the last 6 months and many view instalment loans in the same way.
What are the alternatives to short term instalment loans?
While they may be convenient and easy to apply for, monthly instalment loans online are never cheap and there are numerous alternatives that could allow you to borrow what you need for less and look better on your credit file.
Using a credit card instead of applying for a loan could be a much cheaper option and if you opt for a 0% purchase credit card you could spread your repayments over several months, without paying a penny in interest!
If you need cash then a 0% money transfer credit card could allow you to move money into your current account and repay over several months without charging interest - all you pay is a small money transfer fee, usually between 3-5% of the transfer amount. Read our guide:
Can I Transfer Money from my Credit Card for more details.
Even if you have a poor credit history a bad credit credit card could be a cheaper option than long term loans for bad credit and give you greater flexibility.
A current account overdraft can offer a flexible and affordable alternative to instalment loans.
The exact overdraft amount you'll be permitted will depend on your credit history, income and how long you've been with your bank.
Most overdrafts can be added to your current account overnight, so you can access the funds the next day.
While overdrafts are invariably cheaper than instalment loans there are often charges and extra costs if you go over you limit, so read our guide to working out the size and cost of your overdraft.
Family & friends
If you need borrow money you don't necessarily have to turn to a bank or professional lender, in fact if you have family or friends who are willing to lend you the cash this could work out much cheaper.
There are still several things you need to consider before borrowing money from a family member, including how long you will take to repay it, if you'll have to pay any interest on the money and if you are both happy that the loan won't adversely affect your relationship.
Our guide: Lending to Friends: How to Make Sure You Get Your Money Back takes a closer look at borrowing this way and what you and the person you're borrowing from need to consider.
If you need to borrow to pay for essential things like rent, furniture or clothes and receive income related benefits you may qualify for a Budgeting Loan.
These loans are direct from the government and interest free and can be spread over anywhere up to two years.
To find out if you meet the eligibility criteria and how to apply visit the
Local organisations that offer loans and savings accounts to their members, credit unions could be an affordable alternative to an instalment loan.
How to get the best instalment loan
If you've decided that long term payday loans are best solution then you'll want to get the cheapest you can find.
Before you apply you need to decide on the following:
How much you need to borrow?
Before you approach any direct lenders for instalment loans you need to settle on a fixed loan amount and stick to it.
It can sometimes be tempting to borrow more than you actually need, especially if it's being offered on a plate by the lender, but remember the more you borrow the more you'll have to pay back in interest. SO be sure to stick to your guns and not take that little bit extra.
How long you need to repay the instalment loan?
After you've settled on the amount you need to borrow you need to decide how long you need to repay the loan.
Again it can be tempting to spread the cost to reduce your monthly repayments but in most cases the longer you take to repay, the more you'll have to pay in interest.
If you borrow the same amount you'll almost always have to pay more back if you choose 12 month instalment loans over shorter 3 or 6 month instalment loans.
You need to balance keeping your repayments affordable with repaying your loan as quickly as possible. 3 month instalment loans tend to be the shortest available from most lenders so check if you could afford the repayments over 3 months first before looking at longer loans if you need to.
Do you need the flexibility to repay early?
Some instalment lenders allow you to repay your long term payday loan early, which can be great if you want to be debt free ahead of schedule.
While this flexibility can be convenient you need to make sure you're not stung by early repayment charges, if you think you might want to repay early, check if the lender you've chosen will hit you with fees and if they do think about looking elsewhere.
Once you know what you're looking for you can begin to compare instalment loans to find the least expensive option.
Our instalment loan comparison only lists reputable instalment loan lenders that abide by FCA regulations so you can find the cheapest option from a legitimate source.
We list both direct lenders and brokers so you can compare as many different providers to find the cheapest option.
Avoid making multiple applications as this will harm your credit record, instead use the cost calculators on each site to get an idea of how much your repayments will be before applying.