What is instalment credit?

You borrow a set amount for a set term and repay it in regular instalments, usually monthly. Each instalment covers the interest on the balance still owing and a portion of the principal, so the balance falls with every payment and reaches zero on the last one. Car finance sometimes ends with a balloon payment instead, which lowers the monthly repayments but leaves a lump sum at the end.

Terms depend on the product: personal loans commonly run one to seven years, car finance three to six, card instalment plans are shorter, and fixed-instalment BNPL plans often run from four to 24 weeks. Most contracts let you repay early, but check for early repayment or exit fees, and for break costs on a fixed rate contract.

The interest rate is only part of the cost. Establishment fees, ongoing account fees, early exit fees, late payment fees and default interest all add to what you repay. The comparison rate combines the interest and most fees into a single annualised figure, which makes offers easier to line up, but always check which fees it leaves out and read the pre-contractual statement, the lender's credit guide and the target market determination.

Under the National Consumer Credit Protection Act, lenders must make reasonable inquiries about your finances, verify them, and assess that the credit is not unsuitable. That means checking income and employment stability, living expenses and other commitments, and credit history and enquiries. Lenders then apply their own buffers and policies on top, such as testing whether you could still meet the repayments if rates rose. Applying creates a credit enquiry, and your repayments and any defaults are reported to the credit bureaus.

Instalment credit has a fixed term and a scheduled path to zero. Revolving credit, such as a credit card or line of credit, gives you an ongoing limit with minimum payments, which is flexible but can cost more interest if you carry a balance. The two are also reported differently on your credit file.

Instalment credit suits a defined purchase, a renovation, or consolidating high-cost card debt into one predictable repayment. It is less useful if you need to draw extra funds at short notice. If repayments become hard to meet, contact the lender early about hardship options, and free help is available from financial counsellors and the National Debt Helpline.