Installment payments are an inherent part of our economy – we use this format to pay for everything from relatively small things like clothing and tech to big purchases like vehicles and houses.
Today, installment payments are accessible in a variety of ways, especially through the growing popularity of buy now, pay later payment platforms. Here, we’ll take a closer look at what installment payments are, how they work for customers and retailers, and the pros and cons behind installment payment plans.
What are installment payments?
Installment payments are a relatively straightforward payment plan – you pay for an item over a series of installments. This means that instead of paying the full amount upfront, the cost is split up and paid off over time.
Depending on the product and the provider, installment payments can take shape in a variety of different ways. When it comes to BNPL and installment payments, the process is generally as follows:
- Customer signs up for an installment plan at the time of purchase
- Customer pays the first installment on the day of purchase
- The remaining balance is split into a series of installments and a repayment schedule is established (such as a payment every two weeks)
- Customer pays the remaining installments over a set period of time until the balance is paid in full
How do installment payments work?
The way installment payments work can vary a bit, depending on the provider and how they operate.
Some stores or retailers offer installment payments in-house, as part of their own business model. Many modern retailers partner with BNPL providers, or installment tech providers such as Splitit, to offer and manage installment payment plans for their customers.
Generally speaking, this is how installment payments work in the BNPL world:
- Customer finds something they want to purchase from a retailer
- Customer enters into an agreement with the retailer’s BNPL provider, in which the customer will fill out an application and share their card info in order to secure funding for their purchase. With Splitit there is no application process, the customer simply fills in their credit card details and chooses the number of installments
- Customer pays the first installment upfront
- Customer receives their purchase
- BNPL provider charges the customer’s card at each agreed-upon intstallment interval
- Depending on the agreement between the BNPL provider and the retailer, they may process the entire transaction and pay the retailer in full upfront, or they may transfer payments over in line with the customer’s repayment schedule
Are installment payments a good idea?
As with any purchase or financial decision, whether or not installment payments are a good idea really depends on the customer’s individual circumstances.
We’ve broken down the benefits and considerations here, but it’s important for customers to think carefully based on their own budget.
What are the advantages of installment payments?
So – why pay in installments? Installment payments offer many advantages for both customers and retailers alike. We’ve listed some of the top reasons they’re an appealing option below.
Benefits of installment payments:
- Budget-friendly option: Can split out the cost over time and avoid paying a large sum upfront.
- Flexibility over finances: Allows customers to spread out their spending over time, giving them more flexibility and control over their finances.
- Can help build credit: If you’re using a card-attached installment platform like Splitit to fund your installment payments, you can build on your credit profile while paying back your installment plan without having to take out a new line of credit.
What are the considerations surrounding installment payments?
Just as with any financial decision, there are some key things for your customers to consider and think about before entering into an installment payment plan.
Considerations of installment payments:
- Making repayments: Before signing up for an installment payment plan, it’s vital that the customer ensures that they’ll be able to meet their regular repayments in the future.
Interest, fees, and penalties: Some installment payment plans, such as legacy BNPL platforms, will charge interest on the customers purchase, fees for using the service, and penalties for late or missed payments. - Impact on credit report: Some installment payment plans will show up on their credit report, which can have an impact on their overall credit rating, depending on their account activity.
- Responsible lending: Some installment payment plans come with high interest and hidden fees attached – it’s important to double-check the provider and ensure they’re adhering to responsible lending practices.
How to calculate installment payments
When doing the math to figure out how much you’ll be paying across your installment payment plan, there are a few key numbers you’ll need:
- Purchase price
- Upfront payment
- Number of installments (after upfront payment)
- Fees or interest (if relevant)
Most installment payment providers will have a simple calculator that allows you to plug in your purchase price and installment period, to give you a quick and straightforward breakdown of the cost.
However, if you want to run the numbers yourself, the calculation will look something like:
- Purchase price + Fees (if relevant) = Total cost
- Total cost – Upfront payment = Amount owing
- Amount owing ÷ Number of installments = Installment amount
- Installment payment amount + Interest (if relevant) = Total installment payment
What stores offer installment payments?
The short answer is: pretty much every store.
The BNPL market is valued at over $181 billion USD globally. You’ve probably noticed that most online checkouts now include a buy now, pay later platform – which means they’re giving customers an installment payment option!
From fashion retailers to tech and services, installment payments are being leveraged to offer customers a more flexible way to budget for their purchases.
Many BNPL providers have also extended their service offering to customers shopping in a brick-and-mortar environment. And, if you think back, installment payments have historically been a major function of traditional retail outlets, especially when it comes to high-value items such as furniture, electronics, and vehicles.
Learn about how Splitit has been a success across various industries.
How to accept installment payments
Allowing your customers to pay in installments is a great way to drive conversion and build good relationships with shoppers who are looking for a more flexible payment option.
If you’re looking to incorporate it as an internal solution, the logistics of accepting installment payments can be significant (which is why most retailers choose to partner with a BNPL platform).
You’ll need to process customer applications, set up a payment system, keep track of payment schedules, follow up any late or missed payments, and coordinate this financing with all relevant bodies and bureaus to ensure you’re following the correct regulations.
Alternatively, when you partner with Splitit, we take care of all of those aspects for you – and you can maintain BNPL within your own branding as part of our white-label solution. That means, from a customer perspective, the installment payment system is a holistic part of your website, but we take care of all the behind-the-scenes work for you.
Learn how to get started with Splitit.
Which installment payment options are available?
Installment payment plans take shape in a variety of forms, depending on the sector, retailer, and payment plan provider. Some of the most common ones available in the ecommerce and retail world include:
Installment payments which require a new loan
- Credit-based installment plan: Historically the most common form of installment payments, the customer borrows the total purchase amount from the retailer, BNPL provider, or another installment payment provider (such as a bank).
The customer puts down an initial down payment towards their purchase and pays off the rest over time, with interest.
- Legacy buy now, pay later: These are popular platforms like Affirm and Afterpay that often follow a pay-in-4 format, in which customers make an initial payment at the time of purchase and pay the remaining 3 installments over the next 6 weeks. This involves taking out a new source of financing through the BNPL provider. These providers may also charge late fees for missed payments.
Installment payments that use existing credit
- Splitit’s Installments platform: Customers use the existing space on their credit card to fund their BNPL plan, which means they don’t need to take out additional credit or a new line of financing. A pre-authorized hold will be placed on their card for the total amount at the time of purchase and reduced over time, as the installments are charged to their card. Splitit never charges the customer interest or fees.*
Does offering an installment payment plan option increase ecommerce conversion rate?
Offering an installment payment solution can increase conversion rates significantly – with Splitit, retailers can offer their customers more diversity in the checkout, providing them with options that can be tailored to their budget.
Our existing-card based platform means there’s no need for shoppers to take out a new line of financing or add to their credit profile – they’re simply using resources they already have.
There’s also the added perks of building on their credit score and taking advantage of credit card rewards, without having to frontload their card and think about interest building up over time.
If you’re ready to expand your payment solutions and give customers an installment payment option, we’re here to help. Learn more about how to choose a BNPL solution or get in touch with us today.
*Standard credit card terms and conditions still apply.