What Is The Difference Between Payday and Installment Loans?
Although they might seem similar there are some distinct differences between a payday loan and an installment loan, and choosing one or the other will be dependent on what you need the loan for and your individual circumstances.
Payday and Installment Loan Differences
A payday loan is a short term commitment and usually consists of an amount of just a few hundred dollars. You are expected to pay back the full amount, plus a single finance charge within a few weeks - usually at the time of your next pay check. Payday loan terms are rarely longer than a month and you cannot borrow more than 25% of your gross monthly income.
Installment loans are often considered an extended version of a payday loan. You are allowed to borrow more than a payday loan in total, and this is repaid over a longer period of time in monthly or weekly installments. There will also be interest applied to each payment much like a traditional bank loan or other form of credit.
Where an installment loan is similar to a payday loan is that the amount you can borrow is based off your income, usually no more than 25% of the gross. Where a payday loan bases this off one month's earnings, and installment loan bases this off a longer duration of up to 3 years.
The lender may also work out a convenient repayment schedule that is in tune with your payday schedule. For example if you're paid on the 20th every month you may agree to an automatic bank transfer on the 21st every month. In many ways an installment loan is like taking out a payday loan every month, but it also much like a personal loan from the bank.
Of course with a longer duration comes extra responsibility and more chances for slipping up on repayment. It is important to think through which loan is better for you before applying.
Installment Loan Considerations:
Can You Afford It In The Long Term?
A Payday loan term can be completed in just a couple of weeks, while an installment loan is a longer term commitment. Over this period your circumstances might change. Your ability to make a repayment one month doesn't necessarily mean you'll be able to do the same 3 months later. You could lose your job, be faced with unforeseen expenses, or have a medical issue that effects your financial situation. Can you commit long term?
Is A Payday Loan More Appropriate?
If you're looking for emergency cash and can cover the loan with your next pay check, a payday loan may be more appropriate. If you need a larger sum of money then an installment loan may be the better option.
Installment Loan Benefits
The longer duration of an installment loan is often considered its core benefit as long as the borrower is wise with their finances.
Even if you can afford to pay off a payday loan in one lump sum, there are many reasons why you may want to space payments out. For example perhaps there are other things you might need to spend your money on when your first pay check comes around.
There is also the fact that you can borrow more, but aren't judged on the same level as a regular bank loan. You are still about as likely to be approved for an installment loan as you are a payday loan. While the lender cannot promise no credit check, bad credit doesn't necessarily mean you won't be approved. The total amount you can borrow can enter the thousands, while payday loans are usually capped at $1,000 and are often only in the low hundreds.
Installment loans also have some of the same benefits as payday loans. Cash can be deposited within 24 hours after an easy online process, and you do not have to fill out the reams of paperwork often associated with regular bank loans. Furthermore the interest rate is fixed so you'll know exactly how much is due on each repayment date, whereas other forms of credit can have confusing variable rates.
Taking out a manageable installment loan is also a good way to improve your credit score. Because the amount you can borrow and the repayment terms are pegged to your payday schedule you are unlikely to get in to financial trouble, but at the end of it you have a positive record on your credit score showing that you are a trustworthy borrower.
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