Instalment debts are one of the most traditional methods of providing loans by lenders. Typically raised for large purchases such as real estate or automobiles, they are opted for when the borrower does not have the upfront cash to pay for such purchases. And these loans offered on big-ticket items are a prominent source of income generation for most institutions in the lending business.
Any loan that is spread over some time and the borrower is obliged to make monthly payments inclusive of interest and the principal amount is called an Instalment debt. The borrower receives a fixed amount of money in a lump sum in the starting and then repays it in fixed equal instalments for the remaining period of the debt. The payments in instalment debts are based on a standard amortisation schedule, that determines the size of the instalments. A borrower of instalment debt may choose to finance either the entire amount or a part of it through the loan.
An instalment loan is a source of regular income for a lender. It is not only more popular among the borrowers but is also more secure than other alternative loans that do not require repayments to be made in instalments. Some of the other features of Instalment debts are:
When borrowing money for large purchases, the risk of default in repayment increases. In offering loans that carry a higher risk of default, instalment debts are a suitable option as it binds the borrower to repay fixed instalments every month.
An instalment debt is to be paid on a schedule fixed by the borrower and it helps both parties to budget their money for every month. Especially in the case of house loans, budgeting your finances is a very important requirement.
An amortisation schedule is fixed based on various factors. Such as the total principal borrowed, the rate of interest, the tenure of the loan, any down payments to be made and the number of instalments both parties agree to add.
Secured Instalment loans are raised against some collateral. For example, if a loan is raised to buy a house, that house is the collateral against the loan. In case of default, the lender can possess the title of the house and sell it to recover the money.
Unsecured Instalment loans usually come with a higher interest rate and a popular example of it is a credit card account.
