When it comes to getting quick cash in a bind, there are a couple of personal loans that borrowers consistently turn to. These are payday loans and installment loans. And knowing the ins and outs of these financial products could help you save time, money, and effort in the long run. While both payday loans and installment loans are considered personal loans, they have many differences.
No matter what kind of personal loans you’re interested in, there are many lenders out there that hope to take advantage of borrowers in need. It’s an unfortunate fact, but knowing this will help you keep your eyes open for all of the red flags. And knowing how each of these loans works will help you avoid predatory lenders.
If you’ve needed quick cash in the past, then you’ve likely heard of these two types of personal loans. They’re very common in the world of short-term cash loans. They can be found online or at storefront locations. But before you sign for one, make sure you know exactly how they work, what kind of interest rates they offer, and what to expect. Read on to learn more about getting an installment loan vs payday loan, and to find out if one of them may be right for you.
What Are Payday Loans?
A payday loan is a short-term, unsecured, personal loan. But what do these words really mean? Let’s break them down, starting with “personal loan.” A personal loan is any loan that a borrower takes out for personal reasons, as opposed to business purposes. They may be used to pay for car repairs, children’s school costs, medical bills, home repairs, and any other personal expenses. There are many different kinds of personal loans, and a payday loan is just one of them.
Payday loans are known for being short-term loans. A payday loan normally needs to be repaid within two weeks from the start date. This is unique to payday loans, and not seen in many other personal loans. On the due date, the borrower is required to repay the full amount plus interest and fees. It would also be considered an unsecured loan, which means that you can get one without offering the lender any collateral. If you’re considering a payday loan, keep in mind that the short repayment period makes it difficult to pay them back. This is definitely the type of loan that should be reserved for emergencies.
How Does a Payday Loan Work?
A payday loan works much like any other type of loan. The first step is to find a lender and fill out an application. Lenders can be found online or at storefront locations. Many lenders now offer online applications. Once you fill out the application the lender will review it and determine whether or not they should offer you a loan.
Oftentimes, lenders will run a credit check and review your bank account, credit score, and income in addition to your application. This helps them to know whether or not you’re a trustworthy borrower, and whether you can afford to make the payments for the loan. Unfortunately, there are many payday lenders that might not review your credit history or perform any sort of credit check. This may be a red flag that they care more about getting late fees and additional interest charges than they do about borrowers repaying their payday loans on time. It’s a good rule of thumb to use a lender that performs a credit check.
If you are issued a payday loan, you’ll usually have about two weeks to pay it back. Payday loans are paid back in one lump sum on the due date, along with any interest and fees. One of the main reasons payday loans are difficult to repay is that they tend to have high interest rates, and must be repaid in such a short period of time.
The loan amount you receive is usually rather small. Payday loans tend to offer only a few hundred dollars in most cases. But the loan amount will largely depend on the lender, the borrower’s credit history, income, and the laws in the state where they reside.
If you pay back your payday loan on the due date, then the contract is fulfilled and your loan is complete. Some lenders will require you to provide a post-dated check before issuing you the loan. Then on your next payday, they will cash your check. If you can’t repay the loan, then that’s where you may run into problems. Not repaying the loan on time usually leads to a process known as “rollover.” Rolling over a loan means extending the loan term to your next payday, which gives you more time to pay it back. The problem is that extending the payday loan will also add more interest, and potentially additional fees and charges.
Payday loan borrowers who roll over a loan tend to do it several times. This creates a cycle of debt for the borrower that can be difficult to escape. This is why it’s always a good idea to make sure you can repay the loan in full before signing for it. Which is good advice for any loan or financial product.
What Are Installment Loans?
Now that you’re familiar with payday lenders and their application process, it’s time to discuss installment loans. An installment loan is also an unsecured personal loan, but there are some major differences when compares to payday loans. While they may be used for some of the same reasons as payday loans, the differences between installment loans and payday are plenty.
It’s important to note that when we say “installment loans” in this article, we’re referring to personal installment loans. There are many different types of installment loans including mortgages, student loans, auto loans, and more. Basically, any loan that is repaid in monthly installments over the course of several months or years would be an installment loan. But a personal installment loan is a fast-cash option often used by borrowers with less-than-perfect credit scores.
How Does an Installment Loan Work?
The application process for an installment loan is the same as many other loans. And just like we mentioned above for payday loans, you can find installment lenders online and at storefront locations. Your first step, as you’ve probably guessed at this point, is to fill out an application. In order to fill out the application, you’ll likely need to have your personal and financial information at the ready. They’ll want to review your bank account status, credit score and history, and more.
Once you’ve applied, the lender will review your information to decide if they can offer you a loan. For installment loans, the lender may take more of your financial history into account than with payday loans. They will likely review your current bank account status, your credit score, your income, and more. For these types of loans, most lenders will perform a credit check.
If you’re offered a loan, many personal installment lenders will directly deposit the money right into your bank account. At that point, the loan begins and your repayment period will start shortly thereafter. You’ll make monthly payments throughout the repayment period, which may last anywhere from a couple of months, up to a couple of years depending on the loan and lender.
Your monthly payments will likely be split between paying off the interest and the principal. So each payment goes toward a portion of both. Once you complete your final payment, the loan contract is complete. If you’re not able to pay your loan off by the due date, or you’re having a difficult time making payments, the lender may offer a refinance. This is the process of changing the loan terms, possibly offering you more money, or lowering your payments, and extending the term.
Which Is Better?
Now for the big question. Installment loans vs payday loans, which is better? Well, the short answer is that many consider an installment loan to be a safer and more secure loan compared to payday loans. Below are some of the reasons that you should consider an installment loan over a payday loan:
Longer Repayment Periods:
Payday loans are usually repaid within only two weeks or on your next payday, through one lump-sum payment. This can be difficult considering the high APR of most payday loans. Paying back a large interest rate and principal in such a short period of time is tough. An installment loan, on the other hand, offers a longer-term. You can pay back your loan in smaller payments over the course of several months. This is usually easier for borrowers than a lump-sum payment.
Larger Loan Amounts:
Payday loans usually only offer a small amount of cash. Typically you can get up to a few hundred dollars. This mostly depends on the lender, your credit history, and the laws in the state where you live. Installment loans usually offer borrowers more money. This is helpful if you have a lot of emergency expenses. If you need a lot of cash from your personal loan, then an installment loan definitely beats a payday or cash advance loan.
Generally speaking, payday loans usually have higher interest rates than installment loans. So if you can qualify for an installment loan, that’s probably the way to go. APR stands for annual percentage rate, and it is the best way to tell how expensive a loan is. APR takes into account the simple interest rate and all of the additional fees and charges associated with the loan. It’s the total cost of borrowing if you were to have the loan for an entire year. When it comes to APR and interest rates for payday vs installment, installment loans are usually a better option.
The Bottom Line
The question of installment vs payday loans should be fairly clear now. Having a bad credit score won’t necessarily stop you from getting payday loans and installment loans, or other types of personal loans. And if you can get approved for one, we would recommend installment over payday loans. You’ll have more time to repay it, you can probably get a higher loan amount, and you may get a lower interest rate. So when it comes to payday loans vs installment loans, the choice is clear.
No matter which financial solution or type of loan you choose, make sure you review the loan terms thoroughly and that you’re able to pay it off by the due date. Always consider things like the loan amount and whether it’s as much as you need interest rates, repayment terms, whether it’s a short or long-term loan and your specific financial needs. Keep in mind that personal loans come in many different shapes and sizes, and they don’t all require good credit for approval.
It’s also important to remember that just because you can borrow money or take out credit cards, doesn’t mean you should. Applying for a loan is a big deal, and it’s crucial to make sure you’re capable of repaying it on time. Especially if it’s a high-interest loan. And unfortunately, many lenders rely on you not being able to repay the loan. Especially lenders that don’t perform credit checks. Most credible loans require a review of your credit history.
The world of loans and financial services can be a complicated one. But stick to these simple rules and you’ll be able to avoid the predatory lenders and unfavorable loan terms. Work on improving your financial habits and eventually your credit score with the main credit bureaus will start to reflect those habits. If you can improve your credit score, eventually you’ll qualify for traditional bank loans, credit union loans, and credit cards with better interest rates.