A loan refers to money borrowed by a debtor from a creditor that is to be paid back at an agreed time at an agreed interest rate.
There are different types of loans for the borrower to choose from depending on which type suits his financial circumstances best.
These loans include car loans, payday loans, personal loans, and consolidated loans. Most of these loans are considered installment loans since the borrower pays the lender back in scheduled monthly payments.
Borrowers should understand the differences between payday loans and installment loans to know what loan works best to their advantage.
Payday loans are usually associated with high-interest rates as compensation for creditors who face the danger of the borrower defaulting repayments.
The creditor cannot perform collection activities if the borrower does not make payment, as payday loans are of unsecured nature. Hence, they do not require you to put up property as collateral.
Payday loans have a simple but expensive application procedure. It involves you writing a personal check for the amount of money you want to borrow.
You are also expected to pay a certain amount of money for borrowing as an application fee. Payday loans take a very short time to be processed.
Borrowers receive their funds in their checking accounts electronically, fast enough to meet their immediate financial needs. Lenders of payday loans ask for little verification which makes qualifying for payday loans quite easy.
Payday loan lenders require verification of employment or income which is determined through recent pay stubs and bank statements. This financial information acts as a guarantee that the borrower is in a position to make repayments.
Online payday loans offer consumers fast applications and upon approval, the funds are deposited directly into the borrower’s checking account.
The repayment procedure involves financial charges being withdrawn electronically on the borrower’s next payday. Payday loans come with certain advantages that appeal to many borrowers.
Advantages of payday loans
1. Easy to get: Payday loans do not involve tiresome procedures and complicated requirements.
This makes it easy for borrowers to get a loan. The basic requirements are quite simple and the lender only requires you to have a stable job and a recurring income to qualify.
2. Fast to get: Most payday loans are transferred electronically into the borrower’s checking account. Upon filling out an application form and having your loan approved, you will have the cash you need really fast.
3. Convenience: Payday loans are convenient as they are readily available. Payday loan companies are located throughout most cities. The availability of online payday loans has made it easier for all borrowers to access this loan online.
Disadvantages of payday loans
1. They are expensive: This is a major reason why most people shy away from payday loans.
Interest rates of a payday loan are extremely high, which is linked to the risk faced by creditors if the borrower defaults on payment.
Application fees are also charged to borrowers, which makes borrowing a payday loan expensive.
2. Payday loans can harm your credit score: As payday loans are expensive, borrowers are often burdened by this high cost. So they may delay making payments which would adversely harm their credit score.
An installment loan is a type of loan where the principal amount and interest are repaid back in scheduled payments known as installments.
Compared to payday loans, installment loans are considered to be cheaper and less risky.
Installment loans are either secured or unsecured, depending on the type of installment loan. Mortgages and car loans are secured where the borrower is expected to put up his house or vehicle as collateral to get the loan.
Personal installment loans, on the other hand, are unsecured and their borrowing is based more on the borrower’s creditworthiness and proof of income.
Advantages of Installment loans
1. Fixed interest rates: It is quite distressing when you wake up to hiked interest rates. Some traditional forms of borrowing have varying interest rates which would in the long run, thereby increase the borrower’s sum of repayment.
With fixed-interest installment loans, your payments remain the same since their interest rates are fixed right from the beginning. You know exactly how much to pay every month. With this knowledge, you can budget your finances carefully so that you can make repayments promptly every month.
2. Longer terms: Long-term installment loans can be as long as 30 years. During this period, the borrower can spread out their repayments over the loan term at his or her convenience. This makes installment loans more flexible than other short-term loans.
3. Easy and fast to acquire: Once you have applied for an installment loan and it is approved, you can get the money when the lender deposits the funds directly into your checking or saving account. Qualifying for an installment loan is very simple.
The borrower has to meet the minimum age requirements of 18 years and older. You should also have a recurring income source. You must also provide a valid checking or savings account where you can receive your funds.
4. No credit checks: Some installment loans do not check the borrower’s credit score. Borrowers with bad credit or no credit can borrow payday installment loans.
Installment loans disadvantages
1. High-Interest rates: Due to the fact that interest rates for installment loans are fixed, some lending companies may take that opportunity to charge outrageous rates. This would adversely increase your loan repayment amount.
With the help of an installment loan calculator, you may avoid this pitfall. The installment loan calculator estimates for you the monthly payments and interest rates you are required to pay for the type of loan you choose.
2. Risk of losing property: There are installment loans that require borrowers to put up collateral in order to secure a loan. In the event that he delays repayment, the creditor has the legal right to call for collection activities. In the long run, the borrower could lose his collateral.
Differences between payday loans and installment loans
Both payday and installment loans are associated with high interest, and they can be easily available without subjecting the borrower to any credit checks. Despite their similarities, they also have their differences.
1. Payday loans are unsecured, while installment loans can be both secured and unsecured depending on the loan type.
2. Payday loans are short-term loans that should be repaid on the borrower’s next payday. Installment loans provide longer-term borrowing of up to 30 years.
3. Payday loans are paid using a post-dated check. For installment loans, lending companies electronically withdraw, or the borrower pays using a check every month.
4. Payday loans have extremely hefty interest rates that may be as much as 390%, whereas an Installment loan can only go up to about 90%.
How to choose the best loan for yourself
There are certain things you should consider before deciding on the type of loan to use. These include:
It is imperative that you choose the type of loan with a lower interest rate. This is because, with a higher interest rate, you may end up paying much more in the long run which may force you to take out another loan to repay the former one.
Installment loans have considerably lower interest rates compared to payday loans.
Effect on your credit score
Both types of loans may have a negative effect on your credit score if you delay in making payments or in the event that you default.
However, making your installments on time every month can help repair your bad credit score. Payday loans, on the other hand, do not improve your credit score.
Payday loans are short-term loans. This means they have faster maturity dates and you are expected to repay the loan within a short time, usually by your next payday.
Long-term installment loans can take up to 15 years, hence allowing you to plan manageable repayment schedules. This makes installment loans more flexible compared to any other form of short-term loan. Get an installment loans calculator and see what you are missing on!