Installment loans and payday loans are two types of loans that individuals in need of extra money can get. While they have many other differences, the main difference between payday loans and Installment loans is that installment loans are paid back with a series of payments while payday loans are repaid a week or two after they are received.
Installment loans and payday loans are two of the most common forms of loans that exist. However, these two loans have a great deal of differences between each other. Put shortly, installment loans are typically larger loans that are repaid over a longer period of time while payday loans are short, quick loans with a fast repayment period.
Installment loans are loans that are repaid in a series of payments. These loans tend to be for a longer time, tend to have greater loan amounts, lower interest rates, and stricter credit requirements for getting them.
Payday loans are loans that are repaid in a week or two from getting your loan. They are typically repaid on the day you get your paycheck, hence the name “payday loan.” Compared to installment loans, payday loans are shorter, for lower amounts, have higher interest rates, and have less strict credit check requirements to qualify for.
Let’s take a more in depth look at both installment loans and payday loans below!
Installment loans are loans that are repaid over a set series of payments called installments. Paying loans off in installments can make paying off loans much more manageable than paying it off all at once.
The vast majority of loans that are offered by lenders are installment loans. Examples of common installment loans include mortgages, car loans, and most personal loans. As such, one installment loan can greatly vary from another installment loan in terms of loan amount, loan repayment terms, and costs of the loan.
With installment loans, you know exactly how much your loan amount is for and how many payments you will be making. If your installment loan has a fixed rate, your payments will be the exact same, which can make payments much easier to make. If your installment has a variable rate, this amount can be changed over time.
With an installment loan, you and your lender agree upon a loan amount as well as the loan terms. Once the loan is agreed upon, you get the loan amount to spend. You, the borrower, then makes loan principal and interest payments on the loan based on the repayment term you and the lender agreed upon. Once the loan principal is paid off, your installment loan is completed and you do not owe any more money.
For example, let’s say you get a fixed auto loan for $5,000 that is to be paid off over 10 years and you make payments on the loan every month. Once your loan is approved, you can use the money to buy your car. Then, you will make a principal payment of $41.66 every month along with interest. Once you make all 12 months of payments for 10 years, your loan is completed.
There are two types of installment loans; secured loans and unsecured loans. Whether your installment loan is unsecured or secured can greatly affect the risk of your loan as a borrower.
Secured loans are loans where the lender requires you to put up something as collateral for the loan. This means that if you fail to pay back the loan, your lender can take whatever you put up as collateral. For example, if your mortgage is a secured loan, your lender can take your home if you fail to pay back the mortgage. Typically, all larger loans are secured loans, as they are much less risky for the lender. On the other hand, secured loans are much more risky for the borrower as they risk losing their loan collateral if they can't pay the loan back.
Unsecured loans are loans that do not require collateral to get the loan. If you fail to pay back your loan, your lender cannot reclaim anything of value from you (although they can sue you). As you might be able to see, an unsecured loan is much more risky for the lenders and is far less risky for the borrowers. Smaller personal loans tend to be some of the only installment loans that do not require collateral
As we mentioned, most loans are installment loans and they can come in any size. Installment loans can be for as little as $25 for a small personal loan and can be tens of millions of dollars for larger loans like mortgages.
Your loan amount depends on what type of installment loan you are getting and can also change based on whether your lender wants to give you your full loan amount or not.
Like loan amount, the loan terms depend on the type of installment loan you are getting. The loan terms of a mortgage will look much more different than a small personal loan of just a few thousands dollars. The repayment terms will also look different from loan to loan.
Loan terms for installment loans like mortgages will typically be for 15-30 years. Payments will be made monthly, but also might be made quarterly or even yearly depending on your loan terms.
Small personal loans have much shorter loan terms than larger loans but again, they can vary on your loan amount. A small personal loan can be repaid in a month while a larger personal loan might be repaid over a few years. Payments are usually made monthly but can be made weekly if the loan is smaller.
Installment loans tend to have lower interest rates than payday loans, mostly due to their size. Costs between installment loans also depend on the loan amount.
Larger installment loans will have lower interest rates than smaller installment loans, but their principal payments will be much greater. Smaller loans will have higher interest rates, but will have much lower principal payments.
Your interest rate can also depend on your credit score. If you have a better credit score, you will have greater access to loans with lower interest than if you have a bad credit score.
Installment loans are much harder to qualify for than payday loans. Payday loans are often available for people with low credit scores while large installment loans have much stricter qualifications.
Installment loans, particularly larger ones, are often given out by banks and credit unions. These institutions want to make sure their money is safe and that the borrower can be trusted to pay back the loan. To ensure this, they make sure their borrowers have very high credit scores and good credit reports.
The specific qualification requirements will vary from lender to lender. However, installment loan lenders will likely require a higher credit score than payday lenders will.
Payday loans are short-term loans that are quickly repaid by your next “payday.” Payday loans tend to be no more than $500 and can be for as low as about $25. They are often used to get additional cash when an urgent situation arises, like covering an unexpected bill or paying rent. Payday loans are widely available to people with low credit scores, but charge very high interest rates.
Payday loans can be controversial and problematic, so let’s dive deeper into them so you can better understand payday loans.
Payday loans work fairly similar to installment loans. With a payday loan, you ask for a specific amount of money from a payday lender. Once they approve your loan application, they give you your loan amount. Depending on your terms, you turn around and pay your loan back in about a week or two.
Unlike many installment loans, you often don’t need to spend payday loans on one specific thing, like a car or a home. Also, because payday loans are so small and have less strict requirements, you can get your application approved and loan amount sent to you all in the same day. This makes payday loans quicker and much more flexible than most installment loans.
Payday loan amounts range from about $25 to $500. While there are some payday loan lenders that allow you to get loans for thousands of dollars, these loans are extremely hard to pay off and should be avoided altogether.
Loan terms will vary from payday lender to payday lender, but the typical payday loan term will involve the borrower repaying their loan on their next payday, which is typically in a week or two.
Like installment loans, payday loans will really depend on your lender. Your loan could be repaid in a week or it could be repaid in a month. Your loan repayment plan could also change depending on if you get a deferred payment plan or you rollover your loan into another loan.
While principal payments are low because of small loan amounts, payday loans have some of the highest interest rates for loans. While this is also due to small loan amounts, it is in large part due to payday borrowers having bad credit scores and lenders taking advantage of borrowers.
Payday loan borrowers tend to need payday loans to make essential purchases. Lenders take advantage of this and charge huge interest rates on these loans, which makes them relatively expensive. APRs for loans can be in the high hundreds and possibly even in the thousands depending on your lender and your credit score.
Payday loans also have various fees associated with them that can make the loans even more expensive.
Qualifying for a payday loan is much easier than qualifying for an installment loan. Payday loans have much looser credit score requirements and often don’t require you to put up collateral. Payday loans also may not require you to verify your income, which almost every installment loan lender will require you to do.
To have a chance to qualify for any payday loan, you will need to be over the age of 18, be a citizen of the U.S., and have verification of your identity.
Payday loans are part of an industry that is rampant with predatory lenders that financially ruin their borrowers. Like we mentioned earlier, many payday borrowers get payday loans out of necessity because they have bad credit scores or because they have no other source of funding. Payday loan borrowers are some of the most vulnerable borrowers, yet payday loan lenders take advantage of this and charge gigantic APRs on the loans.
Due to short repayment periods and high APRs, payday loans are extremely hard to pay back. This causes a huge number of payday loan borrowers to default on their loan which can financially ruin them. If they don’t default, they likely have to take out even more debt which can snowball into bankruptcy. Most payday lenders do nothing to help their borrowers, so you should second guess getting one.
Because of costs and repayment terms, installment loans are much more favorable than payday loans. They are not only easier to pay off, but they are usually cheaper as well. If you have the choice between a payday loan and an installment loan, you should choose an installment loan 99 out of 100 times.
However, if you have a bad credit score an installment loan might not be available and payday loans might seem like your only option. Enter Possible Finance. Possible Finance combines the flexibility and loose requirements of payday loans with the repayments of installment loans to offer our customers a product we call a credit builder loan.
When getting a credit builder loan, we do not check your credit score. As you pay back our easy to pay off loans, we report your payments to two credit bureaus. As you pay it off, your credit history is built which builds your credit score up overtime!
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