Installment Loans vs Payday loans: Which is Better?
Life is not easy all the time. Sometimes your personal expenditure can way exceed your income and it’s times like these that call for a real emergency in terms of finance. That is why it’s important to know about payday loans and installment loans. These two are often put together in the same bracket for the simple reason that they both carry a high rate of interest. This is due to the fact that the borrowers that opt of these usually have a poor credit and/or low income. Such subpar borrowers with bad or little credit history may not have access to the cheaper forms of consumer credit like credit cards or house-equity loans obtained through credit unions or banks.
For most people, these two types of loans are often the only way out to emerge out successful from an unexpected cash crunch.
Let’s take a look at the different aspects of these loans to understand how they vary from each other:
With a short repayment period and a small sum of money, the payday loan is regarded as a quick solution to a sudden financial problem or medical emergency. Payday loans can be availed from an online lender and are approved usually within a couple of minutes, provided you submit correct information. Applicants, in order to qualify for payday loans, must be a minimum of 18 years of age, have a regular income source and a bank account as well.
The installment loan is a type of loan that involves a higher sum of money and gives the borrower the freedom to repay the amount in gradual installments scheduled over a longer period of time. This type of loan typically comes handy during short-term financial problems, or long-drawn struggles, like a chronic medical illness. However, the very fact that they allow for a higher sum of money means that the borrower has to prove their worth and credibility of repaying the loan in due time. This means fulfillment of certain criteria, including the presence of a valid chequing bank account, a regular income source, as well as meeting the minimum salary requirement.
#1 Loan amounts
The primary difference between the two loans is the loan amounts. While payday loans are essentially small sums of money ranging from $100-$1500, installment loans allow for higher loan amounts that could range from $200 to several thousands of dollars. This is simply because the lender has well-stipulated information about the borrower, and the latter is a suitable candidate for getting a loan as they already have some sort of a security or asset to vouch for their eligibility of repaying the loan in time. Thus, installment loans are allowed only when the lender is fully assured of the borrower’s capability to repay the loan.
#2 Payment period
True to their name, payday loans are short-term loans, which means that the borrower gets only about a month or so to pay back the amount in entirety. These loans are repaid as soon as the borrower receives their next paycheck. The relatively short payment period is also because of the fact that payday loans are typically small, easier to pay out, and incur higher risks to the lender.
Installment loans, on the other hand involve a longer time frame for payment. It may range from a few months to a few years ( up to 30 years), depending on the amount of money borrowed in the first place.
#3 Mode of payment
As is evident by their name, installment loans are repayable in installments. A specific sum of money is transferred to the bank at monthly intervals during the loan tenure. Thus, it’s not paid all at once, rather it’s like a monthly recurring payment that continues until the entire loan plus interest is paid up. On the other hand, payday loans are repaid through use of a post-dated check issued to the lender at the time of getting the loan. Repayment may be done electronically, as soon as the borrower’s paycheck has been encashed and the amount transferred to his bank account.
#4 Loan fees & Charges
In case of payday loans, the fees can be calculated with a specific term called annual percentage rates or APR, which can go up to 400% at times. In other words, this means that payday loans entail a higher interest rate, than the installment loans. The latter has a comparatively lower annual percentage rate ranging from 25-100%. Apart from the interest, other financial costs like credit insurance premiums can be paid in monthly installments.
#5 Loan security
Installment loans are typically less risky than payday loans. This is because most of the installment type of loans are secured by the personal property of the borrower. The collateral could be anything, from real estate and cars to electronic items, jewelry and even power tools. This way the risk is more spread out and the lender has a better chance of getting their cash back if the borrower fails to replay the loan amount later on.
On the other hand, payday loans entail a higher risk, especially if you look at what’s required before the approval process. To even qualify for a payday loan, you need to fish out recent paychecks to testify your employment status and the fact that you have a regular source of income. You may also need to produce a post-dated check cashed in by a previous loaner as payment. Besides this check, the lender has no other means of retrieving the money. However, the fact that only small and easily repayable loans are given to borrowers, slightly lower the risk.
Which type of loan is better?
Ultimately, the type of loan you end up choosing will depend on your specific circumstances and preferences. Many people prefer to avail a short-term loan so that they can pay it off faster and even improve their credit score in the process. Then there are few other people who dislike the idea of using up all of their upcoming paycheck to pay off present debts, and would rather use the following months to gradually repay the pending loan.
One thing to remember is that even if you have poor credit, you can still apply for either for the two types of loans, and have an equal chance of being approved for each loan. However, as a word of advice, never take out more than a loan at a time, as this can severely complicate your finances and unleash a slew of future problems to deal with.
Long story short, if you need to borrow more than payday loans allow, then an installment loan is probably your best call. Remember, you should decide only after weighing off your present needs and future financial risks. And if you are still not sure, you can always apply for more than one type of loan, and then choose the one that best suits your needs afterwards.