• Installment loans offer an affordable way of accessing unsecured credit.
  • Borrowers can spread the payment over a period of months or years.
  • Those with poor credit histories may pay more interest, but installment loans still beat short-term borrowing.

Unexpected storm damage, a broken household appliance or urgently needed car repairs can quickly empty your emergency fund. If you’re faced with a large expense and don’t have enough in the bank to cover it, you may be wondering what credit options are open to you. Overdrafts, credit cards and short-term/payday loans can seem appealing, but their high interest rates and charges mean they’re an expensive form of borrowing. For many households, an installment loan makes more sense, offering lower interest rates and a more predictable payment plan.

When Could an Installment Loan Be a Good Choice?

Installment loans are a good option for people who need to borrow a large sum of money over a longer period of time. If you just need money for a few weeks or even a couple of months, and you’re sure you can pay it back quickly, a credit card with a zero percent on purchases offer could make more sense.

If you need several thousand dollars, however, an installment loan lets you spread the cost with predictable monthly payments. For example, the Moneysmart calculator shows a loan of $10,000, at a high (but still appealing compared to credit cards) interest rate of nine percent, would have monthly payments of just $218 when spread over five years. The total repayment amount would be around $13,000.1

Why Choose an Installment Loan?

When you’re considering borrowing money, it’s important to weigh all your options. The interest rates, repayment amounts and early repayment conditions on each option can vary significantly. Learning the ins and outs of each option can help you make better borrowing decisions. Installment loans make a lot of sense for bigger purchases or repairs. They’re also a good option when you need to spread the cost of your borrowing over a period of more than a few months. Because unsecured installment loans are available, they can be a flexible and practical option for your emergency needs.

Approvals for Installment Loans Are Usually Quick

Most lenders that offer installment loans can assess your application quickly and transfer the money to your bank account within a day. If you borrow from your bank, the loan could be in your account as soon as you’ve completed the paperwork. Transfers from other financial institutions might take three to five business days, but it’s rare for them to take longer than that. If you need money for an urgent purchase or repair, you should have many fast and convenient funding options available to you.

You Can Tweak Your Repayment Options

Installment loans can be spread over a period of several years. It’s common for lenders to offer terms of between one and five years for moderately sized, unsecured loans. The interest rate charged will depend on your credit history. The more quickly you can pay the loan off, the less interest you’ll pay. However, if your finances are stretched thin, taking a loan over a longer term and paying a smaller monthly payment ensures you’ll be able to make the repayments and still have some buffer to save for future emergencies. This flexibility can be invaluable.

Installment Loans Don’t Always Need Collateral

Some lenders, especially those that specialise in working with people who have poor credit ratings, offer secured loans where the borrower puts down a house or car as collateral. Not all installment loans work like this, however. There are many lenders that offer unsecured loans. The criteria for this kind of loan will be quite strict. Some lenders may ask you to link your bank account with their app, so they can view your recent income and expenditure before approving a loan.

Consolidate High-Interest Debts with an Installment Loan

If you already have several credit cards or have fallen into the trap of revolving short-term, high-interest loans, taking on an installment loan to clear those debts could save you money in the long term. Be sure to budget carefully and consider the reasons those initial debts built up before you start borrowing more money, however. Borrowers who fail to address the underlying cause of their debts often run up fresh credit card balances and end up worse off after taking a consolidation loan.

Repayments Are Recorded on Your Credit File

Individuals who have little or no credit history may benefit from taking out a small, affordable loan. Making regular, on-time payments will show on your credit files with Experian2, Equifax3, and Illion4. Most Australian lenders don’t consider a person’s credit score in the same way as American lenders do. However, they do take into account a borrower’s repayment history as a part of their own risk assessment models. It wouldn’t be worth taking out a loan you don’t need in order to build a credit score, but if you do need to borrow money, choosing an installment loan over a short-term loan could be a good decision.

How to Get an Installment Loan at a Favourable Interest Rate

Interest rates for installment loans can vary. Lenders typically offer rates of between 5.45 and 12.15 percent, depending on the size of the loan and the borrower’s credit history.5 It’s an unfortunate fact of life that affordable borrowing is usually more readily available to people who are in a relatively secure financial position. However, if you shop around and choose your loans carefully, you can increase your chances of getting a good deal. This is particularly true if your credit history is sparse or there are only a couple of adverse markers on your file.

Try Your Usual Bank

Unfortunately, the days of dressing up in a smart suit and appealing to your bank manager’s better judgment are long gone. Computerized risk assessments drive most banking decisions. It’s still worth making your main bank your first port of call when applying for a loan, however. Your bank will have much more information about your financial history and will be able to see your income and outgoings. If you rarely or never go overdrawn, and they can see that you have a stable income, they may be more likely to approve an application for a loan.

Join a Credit Union

Credit unions are a form of bank run on a not-for-profit basis. Because:

  • These banks are still regulated under the same rules as traditional banks, but the people who bank with them are classed as members, rather than merely customers.
  • Members are part-owners of the union and have a say in how it is operated.
  • Most credit unions charge lower fees than traditional banks and may offer higher interest rates for those who have savings with them.
  • Credit unions are also more likely to be willing to be flexible with loans and charge lower interest rates.

If you’re a member of a credit union and your account has historically been in good standing, the union may be willing to work with you should you need a loan in an emergency.6

Use Eligibility Checkers Before You Apply

If you need a loan, it can be tempting to pull up a list of lenders on a price comparison website and apply to the banks offering the biggest amounts or the best interest rates. This strategy could backfire if you get turned down for the loan. Each time you apply for a loan, the lender does a hard search. This is recorded on your file for other lenders to see. If a prospective lender sees several hard searches on your file over a short period of time, they may assume you’re desperate for credit. Rather than directly applying for loans, use each lender’s eligibility checker first. Performing an eligibility check only results in a soft search that other lenders won’t be able to see.

Avoid Running Up Large Credit Card Debts

If you have a credit card, it can be tempting to use that to cover a shortfall in an emergency. Credit cards can be affordable options for short-term borrowing, or even free if you’re able to clear them before the interest-free period is up. Carrying a balance on a credit card is expensive, however. In addition, if a lender sees that you have credit card debts, they’ll count that debt against you in any affordability calculations. This means it will be harder to access loans in the future.

When a financial crisis hits, it’s important to think carefully about both your immediate needs and your long-term ability to pay back anything you borrow. Making smart decisions today will help you weather this crisis and any future unexpected events.

Moneysmart.gov.au, Personal loan calculator 2
Experian 3
Equifax, Personal 4
illion 5
Finder, Compare Personal Loans 6
Lifehacker, The Difference Between Banks And Credit Unions, Explained