When faced with a financial emergency, you may need to borrow money. Two of the most popular types of loans are payday loans and installment loans. It’s important to understand the differences between the two so you can make an informed decision about the best loan for your situation.
What is a payday loan?
A payday loan is a short-term loan that is typically due on the borrower’s next payday. These loans are often used to cover unexpected expenses or to cover a financial shortfall until the next paycheck. Payday loans are typically for smaller amounts, usually up to $500, and can be approved quickly.
What is an installment loan?
An installment loan is a loan that is paid back over a longer period of time, usually in monthly payments. These loans are typically for larger amounts, up to $5,000, and the repayment period can range from a few months to several years. Installment loans are often used for larger purchases, such as a car or a home renovation.
How do payday loans work?
Payday loans are typically secured with a postdated check or a bank account authorization. The borrower must agree to the terms of the loan, which include the loan amount, the interest rate, and the repayment date. The lender then deposits the loan amount into the borrower’s bank account.
Advantages of payday loans
Payday loans have several advantages, including:
Quick cash
One of the biggest advantages of a payday loan is that you can get the money you need quickly. Most lenders can approve a loan in a matter of minutes and the money can be in your account within a day or two.
Easy to qualify
Payday loans are typically easier to qualify for than other types of loans. Many payday lenders do not require a credit check, so you may be able to qualify even if you have bad credit.
No credit check
Many payday lenders do not require a credit check, so you may be able to qualify even if you have bad credit.
Disadvantages of payday loans
Payday loans also have several disadvantages, including:
High interest rates
Payday loans typically have very high interest rates, which can make them expensive in the long run.
Payment due in full
With a payday loan, the entire loan amount plus interest and fees must be repaid on the due date. If you are unable to make the full payment, you may be charged additional fees.
Potential for debt trap
If you are unable to pay off the loan on the due date, you may be tempted to rollover the loan, which can lead to a debt trap.
How do installment loans work?
Installment loans are similar to payday loans, but the repayment period is longer. The borrower agrees to the terms of the loan, including the loan amount, the interest rate, and the repayment schedule. The lender then deposits the loan amount into the borrower’s bank account and the borrower makes regular payments until the loan is paid off.
Advantages of installment loans
Installment loans have several advantages, including:
Lower interest rates
Installment loans typically have lower interest rates than payday loans, which can make them less expensive in the long run.
Repayment over time
With an installment loan, you can spread out the loan payments over a longer period of time, making them easier to manage.
Can build credit
If you make your payments on time, you may be able to build your credit score.
Disadvantages of installment loans
Installment loans also have several disadvantages, including:
May require collateral
Depending on the lender, you may be required to provide collateral for the loan, such as a car or a house.
May have fees
Some installment loans may have fees, such as origination fees or late fees.
Longer approval time
Installment loans typically take longer to approve than payday loans, so you may have to wait longer to get the money you need.
When deciding whether to choose a payday loan or an installment loan, it’s important to consider your borrowing needs, your credit score, and your ability to repay the loan.
What are my borrowing needs?
Think about how much money you need and how quickly you need it. If you need a small amount of money quickly, a payday loan may be the best option. If you need a larger amount of money and have time to wait for approval, an installment loan may be a better option.
What is my credit score?
Your credit score can affect your ability to qualify for a loan and the interest rate you will pay. If you have bad credit, you may have an easier time qualifying for a payday loan. If you have good credit, you may be able to qualify for a lower interest rate with an installment loan.
Can I repay the loan?
It’s important to make sure you can afford to repay the loan. With a payday loan, you may have to repay the entire amount of the loan plus interest and fees on the due date. With an installment loan, you will be able to spread out the payments over a longer period of time, but you still need to make sure you can afford the payments.
When deciding whether to choose a payday loan or an installment loan, it’s important to consider your borrowing needs, your credit score, and your ability to repay the loan. Payday loans can provide quick cash, but they can be expensive and can lead to a debt trap. Installment loans may have lower interest rates, but they may require collateral and may have fees.
Summary
Payday loans are typically for smaller amounts and can be approved quickly, but they have high interest rates and repayment is due in full on the due date. Installment loans are typically for larger amounts and the repayment period can be spread over a longer period of time, but they may require collateral and may have fees.
Recommendation
It’s important to consider your borrowing needs, your credit score, and your ability to repay the loan before deciding which type of loan is best for you. If you need a small amount of money quickly, a payday loan may be the best option. If you need a larger amount of money and have time to wait for approval, an installment loan may be a better option.
References:
1. “Payday Loans vs. Installment Loans: What’s the Difference?,” Experian, https://www.experian.com/blogs/ask-experian/payday-loans-vs-installment-loans-whats-the-difference/.
2. “Payday Loans,” Consumer Financial Protection Bureau, https://www.consumerfinance.gov/ask-cfpb/what-are-payday-loans-en-1181/.
3. “Installment Loans,” Consumer Financial Protection Bureau, https://www.consumerfinance.gov/ask-cfpb/what-are-installment-loans-en-1184/.
Related Questions
What will stop you from getting a payday loan?
The most common reasons you would get denied for a payday loan (or any loan) would be your credit score, your income, and your past borrowing history. While many payday lenders do cater to borrowers with less-than-average credit scores, some won’t lend to you if they know you don’t have the ability to repay the loan.
How much would a $200 payday loan cost?
Assuming you qualify for a payday loan and you’re approved for a $200 loan, the fee charged on this loan could be $30. The annual percentage rate (APR) on a $200 payday loan also varies by state, but it could be as high as 780%.
Are payday loans ever a good idea?
With steep interest rates and tight repayment timelines, payday loans are rarely the best choice when you need cash. Often these types of loans trap borrowers in an inescapable cycle of debt. Before resorting to a payday loan, consider the many alternatives.
What are 3 alternatives to getting a payday loan?
Best Alternatives to Payday Loans to Consider During a Crisis
- Local nonprofits and charities.
- Medical bill assistance.
- Bad-credit online loans.
- Credit union loans.
- Payment plans for monthly expenses.
- Other ways to make money.
- Lending circles.
- Family loans.
Comments are closed.