When buying expensive goods in a shop, customers prefer to buy them in instalments if the seller offers such an option. The benefit for the buyer is obvious: the cost of the goods does not change and there is an opportunity to extend the payment. But what are the advantages of a shop offering goods in instalments? Why is an instalment payment considered a credit if no interest is charged for the use of the money.

Many people do not understand the difference between instalments and loans and why a business needs additional complications. But if you look into it, it becomes clear that instalments are a unique banking product that benefits all parties involved.

Let’s understand the concepts

The key role in any loan is played by the financial institution, i.e. the bank. The bank receives a loan application from a potential borrower. The lender considers each application individually. The larger the amount requested by the applicant, the more detailed the content of the checked credit history, the more references must be provided to confirm their solvency. It is necessary to collect a package of documents (for each type of loan there is a separate list), fulfil all the conditions of the lender and wait for the approval of the application. The request can be approved or rejected.

In the shop you can take advantage of the benefits of instalments. If you carry your passport with you, you will have no problems with instalments. It is just as easy to get a consumer loan, but buyers are alarmed by the interest rate, so when choosing between credit and instalments, everyone prefers instalments.

What is the difference between an instalment payment and a shop credit?

For the buyer the differences are obvious, but for the bank and the seller there is little difference. A loan is money that the lender provides to the borrower under certain conditions. The bank immediately stipulates the rules for the use of borrowed funds, in the case of a loan for targeted purchases, the terms of repayment (terms, amounts of monthly payments), and also specifies the interest rate. The borrower can immediately calculate the overpayment on the loan and, if possible, repay it early to reduce the overpayment.

An instalment loan is money that the bank transfers to the seller to pay for the buyer’s goods. It is the same loan with interest rate and repayment terms. It is repaid by the buyer, but early repayment of the debt does not reduce the value of the purchased goods. Interest for the use of credit funds is included in the price of goods, so in theory it is paid to the bank by the shop, but in practice it is paid by the buyer. Instalment payment is a great marketing move. The buyer likes instalments more than the possibility of buying on credit. Everyone wins: the bank benefits from the interest, the shop increases demand for the product, and the buyer is happy about a profitable purchase and the possibility of paying its cost in instalments.

What is the difference between a loan and an instalment plan?

• The number of documents required for processing. An instalment loan is issued with a passport, while a loan may require a certificate of income from your place of work, at least six months of work experience, a good credit history, guarantors or collateral if the borrower needs a large loan. 
• Loan term. The bank issues a consumer loan for up to five years, with instalments to be repaid after six months;
• If the instalments of cheap goods are made by the shop without the bank’s intervention, the credit history is not checked. The bank always sends an enquiry to the credit bureau;
• An instalment loan usually requires an advance payment of 30% of the value of the goods. The loan is provided without prepayment and you can start repaying it as early as one month after signing the loan agreement;
• The main difference between instalments and loans is the speed of processing. It is processed in 10-15 minutes, whereas it may take a week to study an application for a bank loan (depending on the amount, loan term, purpose, etc.);
• The interest rate for an instalment programme is usually lower than for a regular consumer loan;
• When receiving an instalment loan, the buyer cannot use it to buy another product (in case of an unexpected change of plans). A consumer loan can be used to purchase various goods and pay for services.

Any type of loan has its pros and cons, so you will have to choose for yourself which loan to take. If you’re struggling because you’re not sure whether instalments or loans are better, consider whether you can pay off your debt early.