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How do installment payments work?

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Last editedApr 20232 min read

Today’s shoppers expect flexibility when it comes to the payments process. There are plenty of benefits to offering flexible payments, chief among which are increased retail conversion rates. According to a study from RBC Capital Markets, offering installment payment options like Buy Now Pay Later (BNPL) loans can increase conversion rates by 20-30%. So, what is an installment payment plan, and how do installment payments work? We’ll cover the basics in this guide.

What are payment installments?

An installment payment plan refers to any bill paid off over time in consecutive, “installment” payments. These installment payments split the bill’s total cost into a series of smaller amounts. Some merchants offer installment payment plans directly to their customers, while others use third-party processors. Merchant agreements are typically interest-free, in contrast to installment loans offered through commercial lenders that come with added interest.

There are three main types of installment payments to consider:

Customer payments: A merchant accepts payment installments from a customer to settle the bill.
Loan repayments: A bank accepts payment installments from a borrower, plus any added interest.
Debt repayments: A creditor accepts payment installments from a borrower, with or without interest.

No matter the type of plan or loan, payment terms should be clearly spelled out at the time of purchase. These include the installment amounts, due dates, interest (if applicable), and final bill.

How do installment payments work?

Installment plans can be offered alongside other payment methods, either on an invoice or at checkout. The merchant should spell out the terms of this installment payment plan. Generally, the buyer agrees to make several equal repayments until the purchase is fully paid. If the total cost isn’t easy to split into equal installments, there might be a final one-off payment.

For example, imagine that a customer purchases new computer software at a total cost of $623. The merchant splits the cost into four installment payments spread out over four months. These include three installment payments of $200 and a final one-off payment of $23 to cover the full cost.

What are the benefits of installment payments?

Accepting payment in installments offers an array of benefits for both buyer and seller. From the customer’s end, paying off larger purchases in installments makes the cost more manageable. The terms are fixed up front without any fees, hidden surprises, or long-term commitment like you would see with subscription and credit card payments.

Businesses benefit from offering flexibility to their customers. Without the option for an installment plan, many customers wouldn’t be able to afford higher value purchases. Providing this option boosts sales and conversion rates while keeping the purchase within your customer’s budget. This is why installment plans are so common with big-ticket purchases like cars and electronic equipment. At the same time, taking payment installments ensures a healthy cash flow with regular income coming into your business.

How to accept installment payments

If you think your customers could benefit from this type of setup, the next step is to figure out how to accept installment payments. There are several options depending on the goods or services you provide. If you issue invoices to your customers, you can set up partial or recurring payments using your accounting software.

For example, GoCardless for Xero includes an installment feature that lets you split your single Xero invoice into a series of recurring GoCardless payments. You customize these payments in terms of payment amount and frequency. Each installment is pulled directly from the customer’s bank account on the day it’s due until the full invoice is paid off. Another option is to use a BNPL service like Klarna, which also partners with GoCardless to collect interest-free installment payments. It’s convenient for both business and customer, providing maximum flexibility and improving cash flow.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.