The Ultimate Guide: Payday Loan vs Installment Loan

Let’s Get Started Understanding Payday Loan vs Installment Loan

Trying to understand the financial world can be difficult, confusing, and even mentally draining. Many people who want to get a personal loan run into an issue of understanding what type of personal loan is best for them. There are various reasons that you may want to get a loan. Loans can be for emergency situations like medical fees or car repair. Or loans can be used to acquire items like a car, a house, or even education such as student loans. Loans can sound scary but in fact, more than 16 million people in the United States have personal loans. 

As long as the terms of the loan are understood, it is a fairly simple process. 

Well, we have created a simple guide to help you understand which personal loan would be beneficial for you. 

A couple types of personal loans are installments and payday loans. There is no clear answer to which one is “better.” This entirely depends on what the loan is meant for, amount of money lent, and ability to be repaid.

What is a Payday Loan?

What are payday loans?This type of loan is meant to be paid back quickly. The loan is given as a lump sum to the borrower and is meant to be repaid with the next paycheck. Though payday loans are meant to be paid back quickly, they have a high interest rate, the Annual Percentage Rate (APR) for these loans can be up to almost 400%. Payday loans are also unsecured, this means that this loan can be borrowed without any type of collateral such as a car or a house. The security for this loan is the knowledge of your next paycheck, along with interest rates and fees. 

Advantages of Payday Loans

  • Fast and Convenient: These loans are quick, only taking minutes to receive the money that is needed. These can be given in a cash amount or online through a banking system. These loans are also not very hard to come by, most big cities have payday loan lenders. 
  • Easy to Obtain: For people who have a stable job, and thus a stable income, can get a Payday Loan. As long as you can prove your paycheck will be coming then you can get this type of personal loan. 
  • Additional Option: When you find yourself in an emergency situation then this is an option available to fall back on. 

Disadvantages of Payday Loans

  • Expensive: With the high-interest rate and fees that come along with this type of personal loan, it can be very hard to pay back the amount within 30 days which will accrue more interest and fees. This can start to become cyclical for many. 
  • Unsecured: Since these are unsecured advances, it adds to the cyclical nature of these loans. Without collateral, you are solely trusted to pay back the amount and without careful planning, the payments can fall through the cracks. 
  • Scammers: Getting quick money always sounds like a good idea, but there is usually a catch. Getting a payday loan from a trusted lender is a pretty safe option, but there are scam lenders everywhere. To avoid scammers, do your research and even ask your own financial institution where to obtain a payday loan. 


What is an Installment Loan?

An installment loan is repaid over a set period of months in installments. These monthly payments have a set amount with a fixed interest rate. The Annual Percentage Rate (APR) for installment loans can range based on credit score and lender. What are installment loans?This is can be the “better” option if you need a longer period of time to repay the debt without being penalized.

Advantages of Installment Loans

  • Quick and Easy: This is a pretty quick process of getting the money needed. Once you are approved it only takes a couple of days for the money to be deposited into your account to use as needed.
  • Planned Payments: What many people like about installment loans is the predictability. These payments are planned out so that each month you know exactly how much needs to be paid, and you have a set number of months to pay it back so you can plan out your finances accordingly. 
  • Installment loans through a tribal lender are easier to get if you don’t have great credit, or even if you have bad credit. There are some eligibility requirements but the rules are not as rigorous as a regular bank.

Disadvantages of Installment Loans 

  • Penalties: If you fail to miss your payments this can result in penalties that cause you to end up paying a lot more. 
  • Unforgivable Conditions: When you apply for an installment loan, it comes with a set contract. This contract will state how much money will be paid back, the length of the repayment, and the fees and interest rate. For some installment loan lenders, these conditions are unbreakable; however, some do allow you to pay off your loan in full ahead of schedule with no pre-payment penalty. 
  • Interest Rate: All installment loans come with an interest rate, depending on what type of loan it is, it can be rather high. This means that over the time of repayment you would actually pay more than you borrowed. 


Can I Get an Installment Loan With Bad Credit?

It is possible to get an installment loan if you don’t have a great credit score. In fact, by making regular payments on a personal loan this can actually improve your credit score. Many lenders will still give you a loan as long as you have a regular monthly income and have an account with a trusted financial institution. Though the fee and interest rate may vary depending on your current credit score. 

What is the difference between a payday loan and an installment loan?

Both these types of personal loans are deemed as “small-dollar, high cost” so you front a small amount, then payback that amount plus some interest. The main difference between these two types of personal loans is the amount of time needed to pay them back. With Payday loans, those are meant to be paid back within a few weeks or less. These loans are to be used for something that you can pay back the next time you get a paycheck. With short term installment loans, these are paid back in consistent monthly payments until the loan is paid off. The borrower understands the term and monthly payment arrangement, along with the final payment date.


How to Pick the Right Online Loan for You

Now that you know the differences between the two main types of personal loans, it is time to see which one is best for you. 

The right loan for you will highly depend on your own unique situation and what the credit is to be used for, and the ability to repay the loan quickly or over time. If you can easily repay the money in just a few weeks versus not being to repay it right away, will decide what type of loan you need to get. Payday loans are easily re-paid whereas installment loans need to require time to pay them back. 

More deciding factors would be your current credit score and how the personal loan will affect your credit score. Payday loans don’t necessarily help to increase your credit score whereas installment loans if payments are made regularly, can increase your score. 

All-in-all, the type of loan that you need will vary between situations. Before getting a loan make sure that you have done your research, have a plan for repayment, and can make payments on time.


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