There are a lot of loan products on the market that make your decision harder to take. Short-term loans can make you forget about your financial problems. But which of them should you choose: payday loans vs. installment loans? They could appear comparable, but there's a significant difference between them. We're jumping into the low down of payday loans versus installment loans that will help you make an informed decision. Let’s begin!
Table of Contents
- What is the Difference Between a Payday Loan and an Installment Loan?
- What Do You Need to Apply for a Loan?
- Alternatives of Payday Loans and Installment Loans
What is the Difference Between a Payday Loan and an Installment Loan?
Both payday and installment loans are considered short-term loans. These loan products provide you with small amounts that you can use to cover emergencies or more significant expenses. Another similarity is that lenders will make a quick verification of your loan request. The direct deposit of both loan products will take one business day.
The critical differences between payday loans and installment loans are stays in the amount you can borrow, the repayment schedule, and the loan costs. To find out more, check all the needed information below.
Definition of Payday Loans
Payday loans are convenient solutions for financial issues that can’t wait till your next paycheck. These are neither installment nor revolving credit. You can get short-term loans in a small cash amount, up to $1,000, and repay them on your next payday. The repayment term of a payday loan is generally 30 days. If you visit a payday loan store or apply online, they'll request income proof and contact details. You'll get the money in your bank account within one business day if approved.
Payday loans can have extremely high-interest rates, usually expressed in an annual percentage rate (APR). The annual percentage rate is around 300%, depending on the regulations of your state. Payday loans have fixed fees that you pay back in one lump sum. Regarding charges, potential borrowers may pay $10 or more as origination, prepayment, or late fees.
Quick Cash: People can get payday loans really fast and cover their unexpected expenses. The funding usually takes place within one business day.
No Credit Check: Most payday lenders don’t want to check your credit history. It will be easier to qualify for a guaranteed payday loan even with a bad credit score.
No Collateral Needed: You do not need to put up your car, property, or anything else as collateral, unlike other loans.
Easy Loan Application: Applying for a payday loan is simple. There is no need to fill out lots of paperwork; you only need evidence of income, a bank account, and personal information.
High-Interest Rates: Payday loans can have higher interest rates than personal loans. Their annual percentage rate might be as high as 375%.
Short Repayment Terms: Payday loans usually must be paid back in full on your next paycheck. That's a tight timeline. If you can't cough up the cash, you're stuck in a cycle of rolling over the loan, which raises more fees.
Definition of Installment Loans
Installment loans are financial tools that let you get a lump sum and pay it back after some time in fixed, regularly scheduled installments. You are dividing the credit into scaled-down pieces, so you don't need to hack up a considerable amount all at once.
Suppose you have some savings and just need extra $5,000 for a new car because your old one is broken. Rather than giving up all that cash in a single shot, you can get an installment loan. The bank or a credit union sets up an arrangement for you to consistently repay a particular amount of money. These payments usually include a part of the loan amount plus some interest.
Interest Rates & Terms
Interest charges can be fixed or variable; interest is included in monthly payments. The repayment term ranges from 12 to 36 months. If you've got a good credit score, you might get a lower interest rate, which means you'll pay less in interest over the life of the loan. Conversely, if your credit score is bad, you might have a higher interest rate, making the loan more expensive. However, the average interest rate of bad credit installment loans is 4.60% – 35.99%.
Predictable Payments: With installment loans, you know exactly how much you must pay monthly. This predictability can make budgeting a whole lot easier.
Structured Repayment: A regular installment loan has a fixed repayment plan, so you know the exact amount of the monthly payment and due date.
Credit Building: If you make your loan payments on time, they are recorded by the major credit bureaus. This way, installment loans might help you establish a credit history.
Collateral for Secured Loans: If you don’t pay your secured loan on time, you may lose the collateral, be it a vehicle, house, or other valuable property.
What Do You Need to Apply for a Loan?
As a borrower, you must meet basic eligibility criteria before getting any loan. Here's what you should provide:
- Basic and Financial Information: name, address, bank account info, phone number, and email address.
- Employment Details: pay stubs and bank statements.
- Identification: ID card or proof of residency.
Alternatives of Payday Loans and Installment Loans
We suggest you explore other options if payday and installment loans seem too expensive. Here are some simple, budget-friendly alternatives:
Friends and Family
Borrowing from loved ones might be challenging, but it's usually interest-free and more flexible regarding repayment. If you want to avoid an official lender, try to speak with your brother or aunt and see if they can help you with money.
Credit unions are similar to banks but often offer lower-interest personal loans to their members. Check if you're eligible to join one. Sometimes, such a financial institution provides a personal loan with discounts that ease your financial burden.
Credit Card with 0% APR
Some credit cards offer a 0% introductory APR for a certain period. You can use this to cover expenses and pay it off without accruing interest.
Payday alternative loans have longer repayment terms (up to 6 months) and lower interest charges. Such payday loans tend to be smaller than most personal loans and have a short-term purpose.
Online Personal Loans
If you have a decent credit score, some online lenders offer personal loans with more reasonable costs than payday loans. A personal loan has a longer repayment term and lower interest rates. You can get a personal loan and repay it with fixed monthly payments like an installment loan.