Instalment loans refer to a lump sum of money to borrowers who are entitled to pay it back in fixed instalments over an extended period of time. Monthly payments include a fraction of the principal amount plus interest. Interest rates that they charge could be fixed or variable.  

When fixed interest rates are levied, the size of monthly instalments will remain the same, but when variable interest rates are charged, your monthly payments will change proportionately to the change in the base rate by the Bank of England. The concept of variable interest rates is applicable to mortgages, though.  

Types of instalment loans 

• Personal loans 
• Auto loans 
• Mortgages 
• Business loans 

Mortgages and auto loans are called secured instalment loans. Mortgages are backed by your house, and auto loans are secured against your car. Personal loans are not secured against any asset, and hence they are called unsecured loans.  

It is worth noting that small emergency loans, such as payday loans and bad credit loans, are also a type of personal loan, but they are not instalment loans. They are rather paid off in one fell swoop. Business loans could be secured and unsecured, depending on the borrowed amount.  

Factors that influence approval of instalment loans 

Here are the factors that impact the approval rate of instalment loans: 

Credit score 

Your credit score plays a paramount role in getting approval for an instalment loan. Whether it is a mortgage or a home improvement loan, your credit score, though it is not the be-all and end-all, influences interest rates, loan amount, and the repayment term.  

Your credit report should be up to scratch if you want to qualify for lower interest rates. The higher the score, the lower the interest rates will be. If your credit score is not stellar, you will be required to arrange a larger down payment to qualify for mortgages and car loans. Whereas you can receive approbation by paying only 10% upfront, it will become double when your credit score is abysmal. Yet, it should not be extremely poor. 

Bear in mind, lenders do not sign off on installment loans with extremely poor credit scores. Many people are under the impression that their credit scores would be fine as long as their payment histories are good, but it is just one factor that makes up their credit score. Other factors include: 

• Credit mix 
• Credit utilization ratio 
• A recent credit activity 
• A credit history 

Keep tracking your credit score to ensure that it is not bad.  

Income 

How much you earn is another important factor that a lender would carefully examine in order to decide how much amount of money you can borrow. Even though your credit score is stellar, your income must be good enough to prove your repayment capacity.  

While taking out a mortgage, a lender would feel inclined to check employment stability. If you are looking to take out a business loan, they would want you to have been running your business for at least two years. Profitable businesses find it easier to qualify for a business loan. If you are a start-up, you will have to submit a business plan.  

Your income will be verified from documents such as a bank statement, income statement, and statement of accounts. Companies and people with short financial histories often struggle to get approval for these loans. Make sure that your financial condition is stable.  

Debt 

How much debt you already owe is another factor that influences lenders’ decisions. A debt-to-income ratio does not affect your credit score, but it can affect your repayment capacity. A high debt-to-income ratio will raise alarm bells. This will call your credibility into question.  

Of course, if you already owe too much debt, you might struggle to keep up with payments after taking out a new one. There is a huge risk of falling behind on debts. An ideal debt-to-income ratio should not be more than 30%.  

How do instalment loans affect your credit score? 

Here is how instalment loans will affect your credit score: 

• Instalment loans can make or ruin your credit score. If you keep paying down all instalments on time, your credit score will certainly ameliorate. If you have a thin credit history, you will benefit from it, but falling behind on payments will wreak havoc on your credit rating.  
• Since applying for an instalment loan means opening a new credit application, hard credit inquiries will be run. They will show up on your credit file, and therefore, your credit score will go down. However, this impact is temporary. Your score will bounce back as soon as you start making payments.  
• Instalment loans will reflect on your credit file. Taking on a new loan will increase the size of the total debt you owe. Your score will naturally drop as your debt-to-income ratio rises.  

At the time of choosing an instalment loan, you should carefully decipher its implications. Make sure that you take out these loans from a reputable direct lender such as VersityLoans.  

What if you miss a payment on an instalment loan? 

Missed payments can have significant consequences. When you miss a payment, your lender will charge late payment fees. You can preclude them from reporting it to credit reference agencies if you try to clear your outstanding balance within 30 days, but you cannot escape late payment charges.  

If you continue to miss payments, your loan will become delinquent. Your lender will inform credit bureaus of late and missed payments. Your lender will send your account to collection agencies if this scenario does not change. As a result, your credit score will be ruined. If you still persist in abdicating your responsibility, you might be taken to court. Once a CCJ is issued against you, it will have far-reaching effects on your credit rating.  

Summing up 

Instalment loans should be paid in full on time. They can build your credit score if you repay it on time, or they can ruin it if you struggle with payments. You should carefully analyze your repayment capacity before using them.