Loans are without a doubt one of the most misunderstood aspects of the financial world. For some, this is a serious matter that ultimately leads to financial security. For them, applying for a loan is the first step to launch a profitable investment that will benefit future generations. However, for others, the loans are seen as a means of treating a habit of poor and impulsive spending. They believe that loans are the fastest way to get the “must-have” money to spend on the latest fashion, or “trends.” No matter how you choose to think about loans, one thing will remain constant: they are of different types and also have different terms. If you like to believe that you are financially savvy or not, knowing the intricate differences between the two loans will help you make informed financial decisions.
Before going into details, here is an overview of the main differences between payday loans and installment loans.
What is a payday loan?
A payday loan is usually described as a way to bridge the cash gap between salaries and other income. It is generally expensive and inexpensive, regularly five hundred dollars or less. It can provide quick and easy access, especially to consumers who cannot benefit from other credits. A payday loan is usually contracted at a credit bureau, and there are several of them around the world. In recent years, the number of online payment credits available to the public has also increased. Interest rates and fees are generally very high, and there is no guarantee. However, your next salary serves as a loan guarantee. The lender offers the money you request and you, on the other hand, repay with the next pay. This is more interest and costs, of course.
What is an installment loan?
An installment loan is a loan that makes regular and fixed payments within a predetermined period. Many financial institutions offer installment loans, including banks, online lenders and credit unions. Installment loans may have other names when issued for specific purposes, such as student loans, auto loans, personal loans, and student loans.
Advantages of the Payday Loan
Convenience: With online and local options, no credit check or guarantee, payday loans can be a very comfortable option.
Fast: You can get the requested money within a few minutes of a request.
Ease: Loans are effortless to obtain, with minimal or no qualifications, other than constant sources of income.
Disadvantages of Payday Loan
- Accessibility: Payday loans are illegal in some states.
- Costly: Payday loans are expensive and should only be used when the consumer has no access to traditional financing.
- Debt Cycle: The short payback period can result in a debt cycle for many borrowers. The debt cycle begins when the borrower cannot repay the loan before maturity and is transferred to new debt with new and additional interest rates.
Advantages of Installment Loan
- Debts: Due to the fixed interest rate, the scheduled payments have the same value and are determined at the time of the loan guarantee. Consumers know precisely when and how much their payments will be, which will allow them to plan accordingly.
- Ease: Although the process varies from one creditor to another, short-term loans are much easier to obtain than traditional loans. Consumers can complete an online application or order over the phone.
- More extended Periods: Unlike a payday loan, an installment loan is paid within months, which reduces the likelihood that the consumer will enter the debt cycle earlier.
- Fast: With the growth of alternative online lenders, consumers can get short-term loans and short-term deposits on their bank account within 24 hours.
Disadvantages of short term loans
- High-interest rates: Short-term loans typically have a higher annual percentage rate than traditional loans because there is no collateral required and accepted lower credit ratings. However, the rates are lower than the type of payday loans and can be reduced by opening the balance payment. When considering an installment loan, check if the lender does not charge a prepayment penalty.
- Late payment fees: Like any financial package, consumers should know in advance what penalties or fees will be charged for late payments. You can evade the fees by setting up automatic payments by your creditor or bank.
Difference between Pay Day Loans versus Installment Loans
Perhaps the only difference of payday loans and installment loan is that both are valid ways to borrow money. Then begins the differences that are highlighted;
- The loan is short-term and will be repaid in full within 30 days. As a general rule, payment is due immediately upon receipt of the borrower’s next paycheck.
- The loan is fully reinvested often at maturity if the borrower cannot afford to repay. Keep extra debtor charges owed the initial loan amount in two to four weeks.
- The amount for the loan usually ranges from a hundred dollars to one thousand five hundred dollars.
- The loan is usually unsecured, and lender assesses the ability of debtors to repay loan repayments according to recent past creditor performance.
- The loan amount generally ranges from one hundred and fifty dollars to several thousand dollars. Interest and other insurance premiums, financial expenses taxes, credit are paid in fixed monthly installments, usually between six months and two years.
- A new collection of fees, interest, and credit insurance premiums can be renewed every few months. The renewal is sometimes accompanied by a small payment which is part of the capital already paid in monthly installments before. The loan amount is usually redefined or increased the initial amount of the loan.
- The actual annual percentage rate loan number is much higher than the annual percentage rate stated in the loan agreement due to the acquisition of certain types of credit insurance, and the lender does not legally bind to.
- The loan is generally secured by personal property, excluding real estate. The warranty may include cars, building, and some other personal stuff.
Before you choose which loan to go with, know which loan is best for you. Below is are ways to determine which type of loan is best for you, consider the following:
- How will you repay? If you ask for a small amount and you can pay it back in one go, payday loans can be perfect; but if they are overpaid in one period, installment loans with reasonable payment rates may be the best option for you.
- How is your credit assessment? It does not matter if you want a payday loan, but you can do it if you want an installment loan.
- How will the loan affect your credit score? If you do not repay one of the loans promptly, they can affect your credit score. Paying a payday loan will not necessarily improve your score, but making timely payments every time can help you have a positive influence on your credit score.
- How much money do you need and how much time do you need to repay it? Whether it’s a lower amount or just a small quick expense, you may want to consider a payday loan. More copious amounts are more difficult to pay so that you can opt for an installment loan.
The type of loan you decide to get is what can help you. Take all your time to determine what is the best decision for you and the current financial situation.