Payday Loans vs Installment Loans
The current loan market is a kaleidoscope of different options and financial products. From auto loans to quick and easy personal finance loans, all of these products come with different terms and conditions. Two of the most common loan structures are payday vs installment loans. They both work differently and offer different benefits for different people. Read my comprehensive guide if you'd like to find out more.
The Difference in a Nutshell
In a nutshell, a payday loan is one that is expected to be paid back in one single lump sum, whilst an installment loan can be paid back over multiple transactions in the form of (usually fixed), regular payments. When understanding the difference between installment vs payday loan terms, it helps to remember that installment loans are longer-term, whilst payday loans are designed to be paid off simply and instantly.
Over the past decade, the number of lenders offering payday loans has skyrocketed, with thousands of companies now doing so. The amount offered varies widely, with some payday loans consisting of only a few hundred dollars and other lenders offering tens of thousands of dollars. They are mostly used to cover temporary cash flow shortages and unexpected expenses.
With a payday loan, you can receive the cash amount you have applied for almost instantly, with no collateral needed. Instead, you guarantee the cost of the loan with your next paycheck. This means that, once you get your salary paid, the money will immediately go to serving your payday loan, meaning that you can pay it all off in one go. While the convenience of payday loans is what makes them attractive to millions of borrowers, there are a few caveats that are worth bearing in mind before applying for one.
- Quick, easy money. Without a doubt, the most appealing aspect of payday loans is the speed and ease with which they can be accessed. Lenders exist everywhere, and most allow you to use their website or app to apply for a loan in an instant, with payment often arriving in minutes.
- Lack of barriers to access. Another appealing feature is that you don't need a top-notch credit score to apply. All you need is a stable, regular income to prove that your next paycheck will be enough to cover the balance.
- Unrivaled convenience. There are no other loan products that can offer the same convenience of payday loans. There is no need for stacks of paperwork, no need to meet with a bank teller, and no need to submit to a lengthy vetting process.
- It can be very expensive. While interest rates for payday loans vary massively, it is worth noting that many providers tend to offset the risk of no collateral by charging high-interest rates. Be prepared to pay interest rates in the high double-digits, particularly for larger loan amounts.
- The risk of falling into the 'payday loan trap'. The ease and convenience of payday loans make them a little too attractive to some. The last thing you want is a situation where you are dedicated your paycheck to pay off a loan every single month, so try not to make a habit of it.
- Predatory lenders. As with many other sectors of the financial market, there are some bad eggs out there you need to be aware of. Scam payday loan lenders are abundant, so make sure to do your research before applying to a provider.
Another option for those seeking loans is installment loans, which tend to be equally common. When considering the installment loan vs payday comparison, the most important thing to remember is that repayment is not instantaneous, but spread out over a predetermined amount of time. Usually, installments are made on a monthly basis, with interest, until the loan is paid off.
The most common way of calculating how much you will pay back in installments is the use of an annual percentage rate, which is essentially a measure of how much extra you would pay over the course of a year. Installment loans are more common for larger loans such as mortgages are auto loans, but this is not exclusively the case. There are advantages and disadvantages to installment loans that are worth being aware of.
- Easy to budget for. A major advantage of installment loans is that you will know from the outset how much you will expect to pay back each month. This makes your loan easy to budget for and reduces the possibilities of any nasty surprises.
- More manageable repayment demands. Another key advantage is that repayment tends to be much more manageable than with payday loans, as you are only paying a small amount back at a time. This means that your financial situation can remain secure throughout.
- Convenience. Much like payday loans, installment loans can be offered and accessed quickly, conveniently, and safely. As long as you meet the criteria, you can expect to receive a loan in a prompt fashion.
- Qualification is more demanding. While payday loans have very few requirements, installment loans tend to ask for more. They will want collateral, which could be having to put up your house or car. They may also want to see your credit score before deciding whether to lend to you.
- Interest rates can be high. While APR is typically lower with installment loans than with payday loans, they can still be on the more expensive end of the spectrum. Always check the T&Cs before applying.
- Missed or early payments can be punished. You read that correctly. With some providers, you may be charged a fee if you decide to pay your loan back early, much in the same way you'd be charged if you missed a payment. Always pay your loan on the dates agreed in the contract.
Payday Installment Loans
An emerging form of loan product called payday installment loans are now becoming increasingly popular. As you might have guessed, these loans take the format of payday loans, with their instant lending and higher interest rates, and combine them with the structure of installment loans - in which you can pay back the amount over a number of months. Some say this is the best of both worlds, while others prefer standard payday loans. It all depends on the type of borrower you are, and what works best for you.
Which of Them is Best for Me?
Now that you know the basics of the payday loan vs installment loan argument, which one is best for you? In reality, both have equal merits and will better benefit certain types of lenders. If you are still undecided, here are a few things to consider:
- If you are in need of a lump sum of cash to cover an unexpected expense, that you know you will be able to pay back with your next paycheck, then a payday loan is probably what you are looking for.
- If you are in need of a larger loan to cover a major purchase such as a house or a car, then you may be better off with an installment loan that you can pay back gradually.
- If you have a credit situation that is less than perfect, you may find that payday lenders will be more willing to provide loans than installment lenders.
With these considerations in mind, you should be able to make a decision about which type of loan is best for your needs. Don't hesitate to check my other comprehensive loan guides for all of the information and advice you could ever need.