Instalment Payments: Meaning, Types, and Examples

Today’s shoppers are exposed to a ton of options to choose from, naturally shaping a dynamic and competitive business environment where companies must stand out to attract attention. 

One of the best ways to do so is to offer the right payment option, which allows the buyer to enjoy convenience, payment terms flexibility, and a smooth checkout process. 

Enter payment instalments – the solution that helps customers pay for any purchase of a product or service, without having to worry about covering the full cost upfront. 

In the following sections, we take a deep dive into instalment payments, uncovering some of the most popular types, the benefits, and more. 

What are instalment payments?

Forecasts indicate that by 2026, 25% of the eCommerce transactions completed around the world will be made up of instalment payments. But what does this term mean and how does it work?

In short, instalment payments represent the act of paying for a bill in multiple payments, usually in consecutive partial payments. 

Instalment payments divide the bill’s total cost into smaller, more manageable chunks. While some merchants provide an instalment payment plan to their shoppers directly, others rely on external processors. In most cases, merchant agreements are interest-free, unlike instalment loans from commercial lenders where there is interest applied. 

How do instalment payments work?

Instalment payments come in different shapes and forms, depending on the deal provided by the merchant or third-party processor. Regardless, the payment terms must be clearly described as part of the broader instalment plan and payment schedule. 

The most popular form of instalment payments is where the shopper agrees to pay money in equal payments until the total sum for the purchase is fully paid. 

From an accounting perspective, businesses can choose to set up partial payments on a single invoice or create recurring invoices for every individual payment until the remaining balance has been settled. 

Types of Instalment Payments

Now that we’ve covered the basics of instalment payments, it’s time to explore the different instalment options available.

Keep in mind that each instalment payment method is different and the right choice for you will depend on your personal preferences, resources, and other factors. 

Secured instalment loans

With secured instalment loans, a lien against an asset is required. For example, this could be a lien against property, an automobile, or others. 

In case the customer doesn’t have the ability to repay the loan, the seller (or lender) has the power to obtain your asset as payment for the balance due. 

Compared to other types of instalment loans, secured instalment loans usually take longer to get as there are specific approval processes that are often time-consuming. At the same time, approvals are not so dependent on credit scores. 

Unsecured instalment loans

On the other hand, unsecured instalment loans are things like Buy Now, Pay Later loans offered by BNPL providers and personal loans.

Unlike secured instalment loans, these options don’t need collateral. They stand out with a much shorter and less complicated approval process that is almost entirely based on credit scores, income, and debt. 

Revolving credit vs. instalment credit

As the name suggests, revolving credit doesn’t come with a fixed number of payments necessary to make in order to cover the full cost of the purchase.

On the contrary, it enables shoppers to borrow money up to a specified credit limit and borrow again once the initial credit has been repaid. 

Meanwhile, instalment credit represents a type of loan where the customer borrows a certain amount of money and agrees to repay it in equal, scheduled payments. 

Fixed-rate instalment loans

Fixed-rate payments represent another type of instalment loan. In this case, the loans have a fixed interest that remains the same throughout the entire lifespan of the loan. 

This means that monthly payments are also consistent throughout the whole loan term, without any unexpected or sudden changes. This naturally makes the budgeting for the payment process much easier. 

Variable-rate instalment loans

Lastly, variable-rate instalment loans come with fluctuating interest rates, depending on sudden shifts in different benchmark rates. 

This makes them rather unstable and challenging for consumers as monthly payments can go up or down depending on external factors. 

Making Informed Decisions

From a shopper’s standpoint, choosing instalment payments as the best payment option must be based on research and informed decision-making.

Although this payment option enables spreading the costs of large purchases over time, there are specific implications when it comes to terms and conditions that must be addressed.

Factors to Consider

When selecting an instalment plan, don’t forget to consider the following essential factors:

• Down payments: The upfront payment shoppers make when choosing an instalment plan will impact their monthly payments as well as the total cost of the loan. In most cases, making a larger down payment means that they can enjoy lower monthly payments and usually, lower interest rates. 

• Interest rates: Some types of instalment payments come with their individual interest rates. Most buyers prefer fixed rates as they provide stability and consistency, eliminating risks of unexpected situations. 

• Term length: Another key factor to consider is the term length outlined in the instalment payment plan. Shorter terms often mean higher payments but are also associated with lower interest throughout the life of the loan. 

As a merchant, make sure that you clearly outline all terms and conditions of your instalment payment plans, avoiding hidden fees for your shoppers. 

Budgeting for Instalments

Effective budgeting for instalments is fundamental both for shoppers covering the payments and the business receiving the money. 

Some of the tips that can help shoppers budget for instalments include: 

• Planning ahead;
• Monitoring spending regularly;
• Staying disciplined with monthly payments;
• Taking advantage of promotions and deals. 

From a consumer’s perspective, it’s also key to analyse monthly income and expenses in order to identify the amount that they can comfortably allocate to monthly payments. 

The Power of Comparison

One of the best ways to make the right decision as a consumer is to compare different instalment payment options. This research process can help you save money, land better terms, and possibly get your hands on products that seemed inaccessible to you in the past.

Different lenders offer different interest rates, term lengths, and conditions. Make sure that you’re fully aware of these details before making your choice. 

Beyond the Basics

While it’s key to understand the core aspects of instalment payments, it’s also useful to look beyond the basics and consider the extra features and options that may be available. 

Early Payment Options

Some instalment payment options come with early payment features, allowing customers to make payments early and, therefore, reduce the total interest paid over the loan’s lifetime. 

In addition, early payment options can help you shorten the payment terms and repay the full amount ahead of the due date. When exploring instalment payment options, check whether the lender offers this feature as part of their terms and conditions.

Missed Payments and Late Fees

At the same time, failing to cover a monthly instalment payment on time can lead to substantial consequences. In most cases, the popular outcomes feature late fees, increased interest rates, and potential damage to your credit score. 

Some lenders may include grace periods as part of their plans or alternative payment arrangements that you might be able to take advantage of. 

Examples of Instalment Payments in Action

We’ve now covered some of the most important details about instalment payments.

Before we move on to the core benefits of this payment option, let’s look at a real-life example.

Let’s say you’re selling tech solutions and one of your customers wants to purchase the latest laptop model that was just recently released on the market. Because of its value and successful marketing, the product costs $5,000. However, the shopper only has $1,000 to spend at the moment.

Via an instalment payment plan, they could split up the total cost into four instalments, covering the remaining $4,000. 

The Benefits of Instalment Payments 

From a business perspective, instalment payments have a lot to offer.

Here are some of the ways in which businesses benefit from providing this payment option to your customers:

• More sales: By offering customers the option to pay in recurring payments for products or services that they can’t afford upfront, businesses can enjoy Increased sales. In addition, repeat purchases are also likely to grow, leading to stronger customer loyalty, repeat sales, and a healthy cash flow. 

• Better customer acquisition: Making instalment sales available naturally results in better customer acquisition and higher conversion rates. The users who show an interest towards your brand but can’t afford what you have to offer can finally turn into shoppers.

• Enhanced customer experience: Instalment payments also contribute to improvements in customer experience by offering shoppers a way to quickly and easily pay in a single click. For example, using digital wallets for monthly instalments offers buyers the ability to store their account information and seamlessly make payments.

• Increase in average order value: Instalment payments can dramatically boost the average order value for your business. Those who cannot afford larger purchases can spread the cost into affordable monthly instalments. With low monthly payments, they can shop for more expensive products or services. 

These benefits ultimately make instalment payments a popular and preferred payment option, both for merchants and for shoppers. 

The Takeaway

Overall, instalment payments are an incredibly beneficial solution for both shoppers and businesses looking to increase their sales, conversion rates, and average order values. 

With forecasts suggesting that this payment option is to continue growing in the future, more and more companies are actively exploring this opportunity, regardless of the industry. 

To start offering instalment payments to your customers, make sure you’ve fully researched your available options and you’ve adequately set your interest rates and terms.

Frequently Asked Questions

What are instalment payments?

Instalment payments are a type of payment plan where the total amount owed is split into a number of smaller, scheduled payments, typically made monthly, until the entire balance is paid off.

What types of purchases can be made using instalment payments?

Instalment payments can be used for a wide array of purchases, such as big-ticket items like cars, electronics, home appliances, furniture, and even services like education or medical procedures.

Can I pay off my instalment loan early?

Yes, a lot of instalment loans allow early repayment, which can bring down the total interest you pay. However, it’s important to check if there are any prepayment penalties, which are fees for paying off the loan before the scheduled end date.