Glossary
Payment Plans
A payment plan is an agreement between a lender and a borrower. The lender provides funds to the borrower on the basis that the borrower will repay the amount in instalments, often with added interest. A fixed amount is repaid on a weekly or monthly basis.
Payment plans allow borrowers to organise their debt. This may be through individual agreements between lenders and borrowers. Borrowers can also consolidate multiple loans into a single agreement to simplify the repayment process.
More commonly, payment plans are used for loans. In this scenario, an initial deposit may be required to secure the loan agreement. Deposits charged as a percentage of the overall amount of money borrowed. The amount varies, but 5%, 10% and even 25% are common practice.
The amount of instalments, the length of the term, the amount of interest charged, and the size of the deposit in a payment plan will depend on the lender’s risk appetite. Consumers with low credit scores, for example, may be required to pay over a longer period with a higher interest rate and deposit than consumers with high credit scores.
Similarly, lenders may tighten their belts in an economic downturn and increase their affordability requirements to consumers. Applying for a new payment plan can be trickier for consumers in a recession as credit becomes harder to come by. But it’s not impossible.
Consumers may be able to change or renegotiate their repayments. If they would like to repay early, extend the term, or are having trouble repaying, lenders may be able to adjust the terms of the payment plan to fit the consumer’s needs.
In retail finance, borrowers are consumers and lenders are third-party providers who embed their finance solution into a merchant’s checkout.