If you need money quickly, you can take out a loan. You can get a variety of loans: personal, payday, installment, or installment loan Borrow the same day. These loans can be used for large purchases and unforeseen circumstances like a funeral, medical emergency, or home repair.
What are the differences between these loans? Specifically, in this article, we look at payday loans versus installment loans. Let us begin.
Payday loans versus installment loans
Installment loans are a broad category that includes mortgages, auto loans, and other personal loans. They are usually longer and are subject to a credit check. Payday loans are usually paid off in one lump sum within two weeks or on the next payday and have higher interest rates. In order to avoid the stigma attached to payday loans, the industry has adopted the term “short-term installment loan.”
What is a Payday Loan?
Payday loans are much smaller, typically less than $1,000, and must be repaid on your next payday (hence the name). When applying for this loan, you may be required to write a postdated check or provide your bank details.
The disadvantage of payday loans is that repayment can be difficult. However, lenders allow you to extend the loan and pay the additional interest on the next payday. Usually they also include late fees.
Below you can read about some of the benefits of payday loans.
Benefits of Payday Loans
They are easily accessible.
For many borrowers, the greatest benefit is the ease with which payday loans can be obtained. Unlike traditional loan products, you can apply online in minutes and have money deposited into your bank account, usually the same day.
They are less stringent than other types of loans.
Payday loans appeal to many borrowers because the acceptance criteria are often less stringent than other types of loans. As a result, lenders often approve borrowers with poor credit ratings and low incomes even though they do not meet the essential eligibility criteria set by banks and other high-street institutions.
You can also be approved if you have bad credit.
As mentioned, you don’t need a perfect credit history to be approved for a payday loan. Borrowers with poor credit ratings can still apply and may even be approved.
It is an unsecured loan.
After that, you don’t necessarily need collateral for a payday loan. They have high interest rates for this reason – to offset the cost if borrowers default.
Let’s now turn to installment loans.
What is an installment loan?
An installment loan can include mortgages, car loans, boat loans, and so on. Installment loans similar to payday loans are usually referred to as “personal loans”.
As with any installment loan, you will receive one lump sum of money in advance. You then pay a fixed monthly rate for the term of the loan. For example, a car loan might last three years, while a mortgage might last thirty years. Installment loans usually have a term of 12 months.
Here are some advantages of installment loans:
The advantages of installment loans
You have high credit limits.
Installment loans allow you to borrow up to $50,000 or more if you meet all of the lender’s requirements.
They can help you build your credit.
If you have a below-average credit rating, you can get a rebuilding installment loan, provided you pay on time. If you have a good credit rating, you can even get better interest rates.
The repayment is fixed.
Installment loans have a fixed repayment amount and a fixed repayment schedule for the entire term. Lenders cannot change your monthly payments unless you want a loan restructuring.
Early repayment is an option.
If you can afford to pay off your loan early, installment loans allow you to do so without incurring any additional fees. However, consult your lender before making early repayments.
Conclusion – Which is better?
If you are eligible for an installment loan, it may be preferable to a payday loan. Payday loans have higher interest rates, and because you can carry them over to the next payday, you could potentially keep putting off payments and get into a cycle of debt.
However, payday loans might be better if you have bad credit, need money urgently, or are able to repay the loan on time. In the end, it depends on your circumstances and financial capabilities.
An alternative to consider: cash advance apps
These are like payday loans and are sometimes referred to as “payroll apps,” but there are a few key differences. There are no physical stores and no interest is charged. Instead, they ask for a “tip”. They make small loans that are repaid with your next paycheck.
Harrison has been a freelance financial reporter for the past 6 years. He knows the big trends in the financial world. Jones’ experience and useful tips help people manage their budgets wisely.