One of the biggest joys of a business owner is to see their business grow, serve more people, expand, and prosper. While this can happen by selling a viral product or by having a good strategy, more often that not, the growth and expansion of a business requires financial assistance.
There are a few ways to get that financial assistance for your business, and one of them is getting an Installment credit.
What is Installment Credit?
Installment credit is a loan that you don’t have to pay back all at once. You can create an agreement with your lender to pay it back over a period of time, this means that you pay a certain amount every month until you complete the loan.
For instance, say you need a bigger signpost for your tourist shop, and you get a loan of $1,000. But instead of paying the entire $1,000 all at once which might be difficult for your business to manage because you need money for other expenses, you pay back $200 (with interest) for 5 months until you reach $1,000.
Instalment credit gives business owners access to money that can be used to get more goods, finer equipment, or take advantage of growth opportunities, and instead of pulling all that money out at once, they pay gradually so it doesn’t affect the business.
How Does it Work?
Instalment credit can either be money or an item. Imagine the tourist shop guy, he can either get the $1,000 to make the signpost, or he can get the signpost delivered to him while he pays the money gradually.
If your next question is how the lenders get their profit, then you are asking the right question. Every loan comes with an interest rate. This means that when you get the money for the item you wish to purchase, you will be paying an extra fee on the amount you were loaned. This extra fee is mostly calculated in percentages of the total amount you were loaned.
Here is an example:
- You need to rent a new office for your business, because you need to expand. You are getting an installment loan of $10,000 to be 24 months with a 5% interest rate.
- This means that instead of paying $416.6 every month for two years until your $10,000 is complete, you will be paying $438.71, because of the extra fee for the interest.
- At the end of the 24 months payment period, you will have paid $10,529.04. The extra $529.04 is the interest. That’s how the lenders get their own profit.
Types of Instalment Credit
There are different types of instalment credit, and each type can either be secured (which means you have to put up collateral or your own assets like a car), or unsecured (which means you don’t need any of your own collateral).
- Mortgages: This is a secured type of instalment credit used to buy a house, with the house as collateral. This means that if you can’t meet the payment requirements, your lender can collect the house. Mortgage loans usually span over 15-30 year payment periods with fixed or adjustable interest rates.
- Student Loans: Student loans are unsecured credit given to undergraduates by the government or a private body and can span over a 10-year repayment period. With student loans, the students don’t have to start paying back immediately; they can wait until graduation before starting the repayment process.
- Auto Loans: These are used to buy a car and those cars are also used as the collateral. They come with fixed interest rates and can span over a 2-7 years repayment period.
- Personal Loans: Personal loans are unsecured loans that can grant you between $1,000 - 5,000 with a repayment period of 2-5 years.
Advantages of Instalment Credit
- Predictability: With a fixed amount to be paid regularly, it's easy for businesses to factor the repayment into their budget because you know how much you are paying back every month, so you can plan your expense breakdown properly.
- Lower Interest Rates: Installment interest rates are usually lower than other types of loans. For example, the current average interest rate for a fixed 30-year mortgage loan is 7.23%.
- Bigger Loan Amounts: Instalment credit can give you bigger amounts for major expenses.
Disadvantages of Instalment Credit
- Qualification Processes: Installment credits have a strict qualification process, including checking your credit history, monthly income, and unpaid debts. An unsatisfactory record of any of these can lead to disqualification.
- Repetitive Process: Once you complete a loan repayment and need another one, you have to start the application process again. It can be time-consuming and can also give room for new questions and rules to affect your chances.
Does Instalment Credit Affect Your Credit Score?
Yes, it certainly does. If you are careful enough to make your scheduled payments on time, it will boost your credit score and give you easier access to more credit in the future.
On the contrary, late payments are usually reported to the credit bureau and will likely affect your credit score.
While paying before the scheduled time can be excellent because it reduces how long you have to keep paying, it doesn’t affect your credit score any more than when you pay on schedule.
As a business owner, understanding the benefits of instalment credit is an excellent tool for making good financial decisions for your business.
It allows you to take opportunities, establish a smooth cash flow and manage your money, goods, and equipment effectively.
Before proceeding with any credit agreement, assess your business's needs, compare available options, and ensure the repayment terms align with how much you believe your business will be making so you don’t run into debt. A well-managed installment credit can be a valuable tool to support your business's growth and success.