What Is the Difference Between a Payday Loan and Installment Loan?

The biggest differences between a payday loan and an installment loan are that personal installment loans usually give borrowers more time to repay, offer borrowers more money, and typically carry lower interest rates. But these terms and conditions will largely depend on the specific loan and lender for each type. 

But what exactly are these types of loans? Knowing the differences can help you decide which one is right for your specific financial situation. Below is a brief explanation of each of these loans:

Payday Loan

A payday loan is a short-term, small-dollar loan that many borrowers use for financial emergencies, or to stretch their money to the next payday. It’s one example of an unsecured loan. This means that you won’t need to offer up any collateral in order to be approved. Payday loans are given based solely on the borrower’s ability to repay, and sometimes their credit history and income. 

The reason payday loans may be difficult to repay is that they don’t allow borrowers very much time, and they carry high interest rates. Because many borrowers who need payday loans have low credit scores, lenders charge more interest. 

Personal Installment Loans

A personal installment loan is sometimes considered to be a good alternative to payday loans. These are unsecured personal loans designed for borrowers with less-than-perfect credit scores. But you may be able to get better terms and conditions than you would with a payday loan. 

These loans tend to allow borrowers more time and flexibility to repay their loans. Depending on the lender, you may have a couple of months up to a couple of years to repay the loan. They also come with lower interest rates in general, than payday loans. It’s easy to see then that they’re usually a better option than a payday loan since they cost less and have more flexibility. 

No matter which loan you choose, it’s very important to make sure you’re capable of repaying it. Never sign for a loan that you’re not 100% sure you can repay on time. This can save you a lot of time and money in the long run.