Difference between a loan and an installment plan

What is a loan

A loan is the provision of borrowed funds at interest for a specific period. In our case, the lender is a bank. However, besides a bank, you can obtain funds from microfinance organizations and individuals — the essence of a loan remains the same.

As a rule, the subject of a loan is cash. This type of loan is the most common among borrowers. Slightly less often, banks issue mortgages and car loans, the subjects of which are real estate and vehicles, respectively.

What is an installment plan

In fact, an installment plan is the same as a loan. The only difference is that this transaction involves an intermediary: the store where you buy the product. Usually, an installment contract is no different from a loan agreement. That is, the bank charges interest for the use of borrowed funds in any case.

Why is there no overpayment with an installment plan? It's simple. The store where you buy the product compensates you for the interest costs. In effect, it gives you a discount equal to the amount you would have overpaid under the contract.

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Pros and cons of a loan

Let's start with the advantages:

• if your loan is multipurpose, you will receive cash in hand and can spend the amount on personal goals;
• you can sign an agreement for a long term and repay the debt with payments that are comfortable for you;
• you can apply for a loan at any convenient time — almost all credit institutions make it possible to do this online via their website;
• with high probability, you will not need a down payment.

Now about the disadvantages:

• the main drawback, of course, is the large overpayment — under current conditions, it can reach 40% per annum;
• the bank may not approve the amount you need if it does not have a guarantee of debt repayment.

Pros and cons of an installment plan

Pros:

• the main advantage of an installment plan is the absence of interest; you only pay the bank the cost of the purchased item;
• simplicity of application — when buying goods in installments, you do not need to collect income and employment certificates;
• high approval rate due to the fact that the purchased item acts as a guarantee of debt repayment.

Cons:

• the bank issues an installment plan for a shorter term — as a rule, no more than one year, which means that the monthly payment amount will be significantly higher than in the case of a loan;
• a down payment is often required, the amount of which can reach 50% of the total debt.

Key differences between an installment plan and a loan

Let's summarize. Installment plans differ from loans in the following ways:

1. Overpayment. As a rule, installment plans have no overpayment—while you receive an interest-bearing loan, the merchant from whom you purchase the goods effectively compensates the interest for you. With a regular loan, there is always an overpayment.
2. Down payment. Usually, a loan does not require a down payment unless it is a mortgage or auto loan. With an installment plan, the down payment can reach up to 50% of the total debt amount.
3. Subject of the transaction. With a loan, it's simple—you receive cash in hand and can dispose of it at your discretion (again, unless it's a mortgage). The subject of an installment plan is always a specific item, such as electronics.
4. Number of parties. A standard loan has two parties—the borrower and the lender. In an installment plan, the merchant is an additional party to the transaction.
5. Additional expenses. When taking out a loan, you may be pushed into buying life and health insurance, payment notification services, and other options that you can decline right on the spot. With an installment plan, you may also be pushed into purchasing a product warranty.

What to choose: a loan or an installment plan? It all depends on the purpose of borrowing. If you are buying goods in several different stores, or if it is more comfortable for you to repay the debt to the bank in small installments over a long period, it is better to take out a loan.

If you are making a purchase in a single store and are completely sure that you can fulfill your obligations to the lender within one to two years, you can apply for an installment plan.