What is the difference?
There are many different types of loans for borrowers to choose from. Car title loans, mortgages, consolidated loans, payday loans, personal loans, and loans from insurance policies are all examples.
Many of these loans are considered installment loans because the borrower pays the lender back in scheduled monthly payments.
A payday loan is usually made in one repayment amount by the borrower’s next paycheck. That’s the main difference between any type of installment loan and a payday loan. However, is one better or worse than the other?
What is a payday loan?
A payday, or salary, the loan is a relatively new invention that came into existence in the early 1990s.
Originally, payday lenders began exclusively as small shops where borrowers could visit them personally to apply for quick cash. Today, while those physical shops still exist, many payday loan transactions are done online from the comfort of one’s very own home.
Taking out a salary loan is one of the fastest and best ways to get instant cash. No matter what your emergency is, requesting a payday loan will get you the needed amount of money in no time (sometimes, a same-day online loan is possible).
Since the service is really fast and easy to get approval for (you usually get no credit check payday loans), payday loans have very high-interest rates which are higher than conventional bank loans.
That’s because payday loan lenders take a risk in not seeking collateral from borrowers, only asking for basic personal information and lending money to applicants with bad credit.
With payday loans, the borrower usually borrows an amount of money that he is confident of repaying on his next payday. Being late in repayment will result in hefty penalties.
Payday loans advantages
There are many advantages of payday loans.
1. Very easy to obtain
Just about anyone with a stable job can apply for a payday loan.
2. Really fast
All that needs to be done is just fill out an application and in a few minutes, you will be approved and have the cash you need. The loan amount can also be transferred to your bank account.
3. Very convenient
Payday loan companies are located throughout most cities and are really easy to find. Nowadays, there are many online payday loan services. This means when you are ready to take out a loan, there is always going to be one available somewhere near you.
4. Always the last resort
When there seems to be no way to get out of a difficult financial situation, payday loans are always there as a last resort option.
Since their terms are relatively lenient, payday lenders will provide instant cash even when no other options are available.
Payday loans disadvantages
There are a few downsides to payday loans that are worth considering before taking out a payday loan.
1. It’s expensive
The interest rates of a payday loan are known to be some of the highest. For many borrowers though, the convenience and speed of being able to obtain money with a fast payday loan when it’s needed are enough to make up for the high-interest rate that comes with one.
There are some scam lending companies, so it is important to know you are dealing with a qualified and legitimate lending company before taking out the loan.
3. Borrowing can become cyclical
It’s important that you do careful financial planning to prevent lagging behind on your repayments. It’s easy for you to fall into a debt cycle that only gets worse over time.
What are installment loans?
An installment loan is a loan in which the principal and interest are repaid in equal installments at scheduled intervals (usually monthly).
Installment loans are considered to be less risky and cheaper to borrow than payday and title loans.
The repayment terms of an installment loan can be as short as a few months or as long as 20 years. Installment loans are usually secured by the personal property of the borrower.
Installment loans have been around much longer than in the 90s. They were initially offered only by small, independent lenders, but eventually were adopted by most major banks.
Installments at scheduled intervals over an agreed period of time.
Installment loans typically grant borrowers much larger amounts than payday loans. For $1,000 to $10,000, borrowers can approach installment lenders for a loan to pay off recurring bills, home mortgages, or medical expenses.
Installment loans are usually repaid over a long period of time which can be as long as 30 years. When taking out an installment loan, the borrower must use a lending institution that operates in the same state where he is staying in, as all installment loans are serviced locally.
Similar to payday loans, you can get Installment loans for bad credit or installment loans with no credit check at all.
Installment loans are fast as they take only one business day for the money to be deposited into the borrower’s bank account.
Installment loans advantages
Similar to payday loans, there are a lot of installment loan advantages, such as:
1. Predictable monthly payments
When you take out an installment loan, there is a fixed interest rate. Your payments will always be the same because the interest rate is already set up at the time when you take out the loan. You will know exactly how much to pay every month.
2. Longer terms
The repayment terms of an installment loan can be as long as 20 years or even more.
3. Easy and fast
It’s very fast to get your hands on the money when you take out an installment loan. Usually, you can get the money deposited directly into your account in just a couple of days after being approved for the loan.
Otherwise, you may get the loan amount in cash. It might be even possible to get payday loans online on the same day.
Installment loans disadvantages
There are some disadvantages to installment loans that are worth careful consideration before signing up for one:
1. High interest
Even though the APR (annual percentage rate) of an installment loan is not as high as that of a payday loan, it’s still going to be high. After making the payments in full, you can even end up paying more than you would with a payday loan.
2. Penalties for missed payments
If you fail to make your payments on time, it can cost you a lot more than you thought.
3. Personal property risk
There are types of installment loans that require you to put up your personal property as collateral.
Payday loans and installment loans differences
Both payday loans and Installment loans are considered to be “high-cost, small-dollar” loans.
Usually, they come with high-interest rates and are extended to people with rather imperfect credit scores or with a specific income level. Even though the two types of loans are similar, there can be some big differences too.
1. Payday loans range from $100 to $1500; installment loans range from $150 to several thousand dollars.
2. Payday loans are short-term and are to be paid back within 30 days. The shortest tenure for installment loans is a few months.
3. Payday loans are repaid through a post-dated check; installment loans are directly withdrawn or paid using a check each month.
4. Payday loans’ APR can be as much as 390%; APR on an installment loan ranges from 25 to 100%.
5. Payday loans are unsecured; installment loans are usually secured but can be unsecured too.
6. Payday loans can be rolled over when it’s due (plus new fees); installment loans can be renewed every few months (with additional fees and interest).
Which loan should you get?
There are a lot of things to consider when deciding