Payday loans and installment loans - which is better?
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When you need a loan to solve a problem, you will need to consider your options to ensure that you are making the right decision. This involves considering different types of loans which include Mortgages, payday loans, car loans, consolidated loans, personal loads, and loans from insurance policies. Most of these types of loan are considered as installment loans since the borrower is expected to pay back the lender in scheduled monthly payments.
However, in most cases, people often confuse installment loans with payday loans. Although both of them provide funds for the borrower, however, they are actually quite different. Before you take out a loan, it is important that you ask yourself some important questions to help you figure out the type of loan you need. Are you in need of small or big loan? What do you need the loan for? What is your financial situation? How do you plan to payback? Figuring out answers to these questions will enable you choose the best type of loan to suit your needs.
In this article, we are going to take a deep look into payday loan and installment loans and find out which one is the best and what the differences between them are. This will enable you to choose the one that is best for your need.
Let's start with the Payday Loan
What is Payday Loan?
From the United States to the United Kingdom, Payday loans seem to be the new SOS for those that are in need of emergency money. This type of loan is usually conducted at a loan agency and you can find a lot of them with good reputation around your city. Payday loans are provided in small amounts usually between $100 t0 $1000 and the borrower is expected to payback in short-term time frame.
People with less-than-perfect credit history can take advantage of this type of loan and repay it in one lump sum on your next payday. When you are taking this kind of loan, you will need to provide assurance that you can pay back in 30 days or less. In most cases, you are expected to repay the loan once you receive your next paycheck.
You can repay payday loan either through a post-dated check or through automatic electronic withdrawal after the borrower's paycheck has been deposited directly in their back account. Payday loan is not legal in every state.
The agency charges a fee when they give you a loan. Usually, this fee can be calculated as an annual percentage rate (APR).However, the actual rate you will be offered will depend on the state you reside in.
Advantages of Payday Loan
There are so many advantages that come with this type of loan, we will take a look at both advantages and disadvantages and decide if it worth risking:
- Easy to obtain
Payday loan is very easy to obtain. You are only required to be an American citizen that has attained 18 years of age or more with a stable job to access payday loan.
- Extremely Fast
If you need fast cash, you can get it in less than an hour using payday loans. You only need to fill out an application.
- Very Convenient
You can easily find a payday loan agency in your city. You can as well find them online. This makes it extremely convenient to access fund when you need it.
- Extra Option
Payday loan provides an extra option for someone who doesn't have another source for a loan. Payday loan agencies will provide you with loan when other options have failed you.
- High Interest Rate
In most cases, this type of loan comes with very high interest rate. However, this balances out when you consider the ease of getting the loan.
- Prone to Scam
There are many scam lenders out there; you will need to be very careful when you want to use this option so that you don't fall into the hands of scam lenders.
What are Installment Loans?
Installment Loans can be seen as a direct opposite of Payday loan. These types of loans are usually for a long term say 6 months to 5 years. Moreover, they are usually for larger amount than payday loans. Installment loans can range from $500 to $100,000.
These types of loans do not require that you pay in lump sums, instead, you can pay back in a fixed monthly installments - mostly over 6 months to a couple of years. Each "installment" and payment schedule is pre-arranged even before finalizing the loan. Each month, you will reduce your interest and principal until eventually you paid the entire loan off. Just like Payday loans, you can be able to obtain installments loans within 24 hours with proper documentation.
Advantages of Installment Loans
- High Amount
If you are looking to get a higher amount of loan (more than $1000) then you will need to go for installment loans as you can get up to $100.000.
- Predictable Repayment on Monthly Basis
Since the "installment" and payment schedule is pre-arranged before finalizing the loan, you already know how much to payback when you receive your paycheck each month.
- Longer Terms
Installment loans, unlike payday loans give you more time to repay your loan.
- Fast and Easy
You can get installment loan within 24 hours if you have proper documentation. In some cases, you will have the money deposited directly to your bank account in few days after you've been approved.
Disadvantages of installment Loans
- High Interest Rate
The APR on an installment loan is usually high. However, it is not as high as a payday loan. But in most cases, you may end paying more than you would with a payday loan when you complete the payment in full.
- Penalties for Failure to Meet up with Installments
You may face serious penalties which will cost you more when you fail to meet up with your monthly installments.
- Loan Secured by Personal Property
In most cases, the lending agency will ask for collateral which includes cars, jewelry, consumer electronics and other valuable properties.
Differences Between Payday Loans and Installment Loans
Both types of loans are seen to be "high-cost, small-dollar loans. They both come with high interest rate and are mostly accessed by those who do not have perfect credit scores and people who are on a specific income level. You can find other similarities between these types of loans. However, there are still some major differences which will help you in choosing the right type of loan for you need.
Below are the differences between Payday loans and Installment loans:
- Payday loans are short-term; you will need to pay within 30 days once you receive your paycheck. But Installments loan can take as long as 6 years before you complete your repayment. You pay back installment loans in monthly installments.
- Payday loans are small. You cannot access more than $1000. However, with installment loans, you can be able to obtain as much as $100,000.
- You pay back payday loans through a post-dated check, while installments loans are paid using a check each month.
- Payday loans are not as secure as installment loans.
- Payday loan APR can be as much as 390% while installment loan APR ranges from 25 to 100%.
Payday Loan Vs. Installment Loan: Which One is Right for You?
Now that you have understood how the both types of loans work, you can now make a decision on which one to choose. Mostly, the type of loan that is right for you will depend on your need and your financial situation at the moment. To help you make a decision, you will need to provide answers to some questions:
How much do you want to borrow? How long will you need the money borrowed? You may consider going for a payday loan if you need just a small amount that you will be able to pay back at end of the month. If you need larger amount, you have no choice than to go for installment loans.
How good/bad is your credit rating? You can obtain a payday loan even if you have bad ratings. But, it is not possible with installment loans.
How do you plan to pay back? If you can pay at once, we recommend you go for payday loan especially if you want to borrow small amount. On the other hand, if paying at once will be too much for you, then installment loan will be an ideal option.
How will your credit score be affected? You also need to know what might happen if you fail to payback on time. You can hurt your credit score and makes it even harder to obtain a loan in the future.
When you have decided to take out a loan, you will need to consider your options carefully; both payday loans and installments loans have their advantages and disadvantages, you will need to know which one works best for you. However, if you are confused, you can seek for help of a professional. Note that when taking out a loan, you will need to find a reputable and trusted agency to lend you money. We can be able to help you anytime you need quick cash. We have experts to help you figure out which type of loans will work best for you.