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The trouble with instalment payments

The trouble with instalment payments
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It’s very easy these days to buy now and pay later. Instalment payment plans like Klarna or PayPal Credit make it simple to break down purchases into manageable payments. But are they a good idea? Or could they be a potential debt trap?

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We’re here to take a look at the pros and cons of these types of plans and how to avoid any future trouble.

What is an instalment payment plan?

An instalment payment plan is basically a ‘buy now, pay later’ plan. It breaks down the full cost of your purchase into monthly instalments. Depending on the plan you use, it can help you spread the cost of your purchase, potentially making it more manageable.

Typically, you will agree to a number of payments to be made over a set period of time. With some plans, you won’t be charged any interest for the duration of the plan. But be warned: there may be set up or monthly fees attached.

What are the advantages of instalment payments?

Paying in instalments is one way to spread the cost of a purchase. There is no denying the benefit of being able to split or defer payments to make a purchase more manageable to pay off.

Instalment payments can provide you with a degree of flexibility. For example, if your washing machine were to break down, you could use an instalment plan to buy a new one without reaching for a credit card.

Another advantage is that instalment plans typically offer some sort of 0% interest offer for the duration of the plan. So unless you already have a 0% purchases credit card, they are typically a cheaper form of borrowing when compared to a standard rate credit card.

Are there disadvantages to instalment payments?

Of course, there are downsides to this type of borrowing – as there are with any type of debt.

If you miss an instalment payment, you may find that your 0% interest period disappears. Then, depending on what type of plan you have, you could be looking at high interest charges that could quickly spiral.

Similarly, missing a payment could mean significant late payment fees and a black mark on your credit report.

Also, it is worth noting that buy now pay later is an unregulated industry. So if something goes wrong and you want to make a complaint, you don’t have the might of an organisation like the Financial Ombudsman behind you.

Can instalment payment debt hurt my credit score?

Depending on how they are used, instalment payment plans can either help or hinder your credit score.

As mentioned, you could damage your credit score by missing a payment. This is likely to have a big impact on your credit rating.

Just by taking out the plan, you are increasing your level of debt. In terms of your credit score, this is never a good thing. Lenders tend to look at your borrowing commitments, and they don’t like it if you have too many.

However, on the flip side, if you have previously taken out an instalment payment plan and successfully paid it off, this could actually improve your credit score. This is mainly because it will show any potential lenders that you are responsible and committed to making the required repayments.

Just be aware that this largely depends on whether your provider runs a full credit check or just a soft search. If it is a soft search, then they usually won’t file on-time payments with the credit reference agencies. So this means you won’t get your big green tick for making your payments on time.

What types of instalment payment accounts are there?

The number of different instalment payment plans has grown in recent years. New start-up apps like Klarna and Clearpay are available. But if you want something from a more traditional brand, then big names like Mastercard, NatWest and Barclaycard also have their own options.

The key elements to bear in mind when looking at an instalment plan is how many payments you will need to make, what the interest rate is and whether or not there are any set-up or monthly fees attached to it.

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