If, for some reason, you need quick cash to deal with sudden expenses, both payday loans and installment loans appear to be good solutions. Nonetheless, you can get confused about which loan to choose. Both have their pros and cons to offer.
The primary differences between payday and installment loans are in their amount, ease of approval, and repaying systems. Payday loans are usually approved on the same day, while installment loans often need longer. However, installment loans offer much higher amounts compared to payday loans.
You need to know about both types in detail. That will help you make an informed decision and choose the right option for you.
7 Difference Between Payday and Installment Loans
Payday loans and installment loans differ from each other in many ways. Here are the major differences you need to know:
1. Collateral Requirement
It refers to whether you need to pledge something to the lender to get a loan. It can be a car, bike, house, or something valuable. The collateral works as a security for the bank or loan provider.
Payday loans usually don’t have such requirements. You can get an unsecured loan without pledging anything. This makes the loan process quicker and easier for everyone. But when it comes to installment loans, the situation varies. Some lenders may ask for collateral pledging, while some may not have such requirements.
2. Loan Amount
There is a large gap when it comes to loan amounts. Legit payday loans direct lenders usually offer $500 – $1000. However, the exact amount varies depending on the lender and state. Installment loans, on the other hand, let you have bigger funding. You can get as much as $100,000 depending on your income or the pledged asset.
3. Funding Timeline
Both loans are known for their quickness. Reliable lenders let you have the payday loan cash on the same day, usually within 12 hours. The duration to get the funding for installment loans varies. Some lenders may give on the same day, but when the amount is bigger, it can take up to 3 business days.
4. Repayment Terms
You can repay installment loans over the course of several months. If the loan amount is big enough, the time can span up to several years as well. However, as the amount is small, payday loans require you to repay the full money in one lump sum.
5. Interest And Fees
Payday loans come with higher interest, often up to 400% yearly rate. In contrast, installment loans have much lower and affordable rates. The fees or charges to get an installment loan are also much lower.
Fees or charges for payday loans can vary. While some lenders don’t ask for a fee, many others do. Besides, borrowers often deal through third parties who may demand additional charges. You need to be aware of the red flags and payday loan scams before paying any upfront fees.
6. Application Process
Payday loans offer a quick process with minimal requirements. In most cases, borrowers have to submit a form only with the necessary information to verify their income sources. For installment loans, the process gets a little longer. Various facts are checked and verified before lending you the money. Yet, this usually does not take more than three business days.
7. Impact On Credit
People with bad credit scores often find it difficult to get a loan. For them, payday loans are better options as you can get payday loans with no credit check. Again, if you pay the loan on time, this won’t have any impact on the credit score, but defaults can lower the score.
On the other hand, installment loans have a more precise impact on your credit. If you pay the loan on time, this will improve your credit score, but defaults can harm it. So, it can be a good opportunity to improve your credit score.
Pros and Cons of Payday Loans
Payday loans come with both pros and cons. Understanding it properly will help you make the choice with confidence:
Pros
- It’s a quick process to get the loan, which is especially beneficial when you need money immediately- the same day.
- No collateral requirements, which makes it more accessible to everyone
- It’s easy to get approval even without a credit check or when you have a bad score
Cons
- The interest is often high, which makes them an extremely expensive borrowing option.
- Payday loans often trap you into a debt cycle. You must read the terms and policies carefully to avoid scams or traps.
- Often, lenders ask for direct access to your checking account, which is not safe if the lender is not reliable.
- The loan amount is often low, which may not help you much.
Pros and Cons of Installment Loans
Similar to payday loans, installment loans have their benefits and shortcomings as well. Check the below discussion proper understanding:
Pros
- You don’t have to pay the full loan in one go. The APRs are lower and you can repay the loan over several months and years. This makes it more affordable and accessible.
- It’s much easier to manage due to low interest rates and flexibility of payments.
- If you pay the loan on time, this will help boost your credit score.
- Since the amount is high, you can use the funded money for various purposes.
Cons
- These loans come with long-term commitment. Monthly payments can stretch out several years, which can be difficult.
- Since a credit check is required, it makes it difficult for many.
Which Loan Is Better for You
So, what loan you should opt for depends on various factors. Here are some suggestions you can consider:
- Loan Amount: The first thing to consider is how much money you need. If it’s something less than a thousand, then payday loans are better. You repay the cash in one lump sum and get free of debt. However, when the needed funds are higher, opt for installment loans.
- Credit Impact: If you want to improve your credit score as well, then go for installment loans. However, if the credit score is already too low, then payday loans are your option to get the money.
- Collateral: If you don’t have anything to offer as a pledged asset, then you can choose payday loans.
Frequently Asked Questions
Are installment loans easier to get?
It’s quite easy to get installment loans. You can get the loan within three business days. However, payday loans are even easier to get since there are no credit checks.
What happens if you pay off an installment loan early?
This will help in multiple ways if you can repay the installment loans early. You will experience a reduced interest and this will also improve your credit score.
Can I pay my payday loan early?
Sure, it’s possible to repay payday loans early. However, this won’t benefit you much. Neither this will lower the interest nor will it have any impact on your credit scores.
Final Words
Both payday loans and installment loans have their pros and cons. You should check their details and understand how they work and their impact. Consider what your needs are, see which one meets your needs, and decide.
