What is Instalment Buying?

Times are tough for many. With a looming cost of living crisis and widespread wage stagnation putting a squeeze on many budgets, most households currently think twice before making larger purchases. This can be a source of enormous frustration for consumers, especially if they encounter car trouble, their TV breaks or their sofa starts to sag.

Consumers need to find new ways to make larger purchases feasible on a limited budget. At the same time, merchants need to make higher-value items available to a broader customer base while catering to a range of payment preferences.

Instalment buying can be an effective way to bring merchants and consumers together to facilitate purchases that may not otherwise be feasible.

Instalment buying definition

Under an instalment buying agreement, merchants agree to sell high-value items to customers without requiring full payment upfront. The amount owed, plus any applicable interest, is divided into regular payments over an agreed timeframe. Recurring payments are set up, usually on a monthly basis, until the full balance has been repaid. Merchants may also choose to accept an upfront deposit which may help to mitigate these regular instalments. The more the consumer can pay upfront, the lower the instalments are likely to be.

Merchants will often reserve the right to repossess goods sold if repayments are missed regularly, thereby mitigating their risk.

Is instalment buying the same as ‘buy now pay later?’

Buy now pay later (BNPL) is a form of instalment buying that has become increasingly popular in recent years, with BNPL providers like Klarna and Clearpay used by a broad range of merchants.

BNPL is a form of short-term credit extended by merchants to consumers. What separates BNPL from other instalment buying solutions is that it is completely interest-free. As long as consumers are able to pay the monthly instalments on time, they will pay only the advertised price of the goods sold.

However, managing BNPL in-house can be difficult and costly for retailers, which is why they often partner with third-party providers. At GoCardless, we provide a recurring payments solution for BNPL providers such as Klarna via Direct Debit. As such, customers may notice GoCardless on their bank statements or mentioned by their Buy Now Pay Later provider, as we take responsibility for collecting instalment payments.

Instalment buying examples

Instalment buying is an umbrella term encompassing a broad range of specific consumer finance agreements. These include BNPL, hire purchase (HP) and Personal Contract Purchases (PCP).

A wide range of consumer goods are frequently purchased through instalment buying, including:

• furniture

• clothes and shoes

• consumer electronics and white goods

• works of art

• vehicles

Advantages of instalment buying

As we can see, instalment buying can benefit consumers and merchants. It has become especially popular in the wake of the global pandemic, where a surge in e-commerce has combined with a global appetite to keep household costs low.

Some of the advantages for all parties include:

• it can facilitate purchases that might not otherwise be feasible for customers

• it may also prolong the relationship between merchant and customer

• it positions merchants offering instalment buying as helpful and sympathetic

• customers may spend more when instalment buying than they would if buying upfront

• some instalment buying options, such as BNPL, are interest-free for consumers

Disadvantages of instalment buying

While instalment buying is broadly advantageous for all parties, there are also certain caveats to consider. For instance:

• consumers can find it difficult when juggling instalment payments for multiple products

• penalties for missed payments can be severe

• customers may need to make substantial balloon payments at the end of their agreements

We can help

If you’re interested in finding out more about instalment buying and how it can benefit both you and your customers, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.