Loans come in different types and forms. And while some times, two or more kinds of loans may appear identical, they’d usually have distinct repayment terms, maximum loan amounts or even APR limits. As a result, it is always helpful to distinguish between multiple forms of cash lending opportunities.
In the United States, two of the most common examples of loans are payday and installment loans. If you’re taking out one of these two kinds of loans, it is always helpful to identify which one you end up with. Otherwise, you may face problems when repaying or even get stuck with loan terms that may hurt your finances.
This article makes the much-needed distinction between payday loans and installment credit facilities. Here, you can also get information about the benefits and demerits of each type of loan as well as places that offer them. If you ever need to navigate applying for a payday loan, we highlight the steps to find payday loans online on the platform of WeLoans, a reputable broker.
How Do Payday Loans and Installment Loans Work?
Payday loans and installment loans work in substantially different ways. Firstly, payday loans are a short-term lending opportunity that typically have a repayment period of two to four weeks. Borrowers of a payday loan get a small amount of money, usually less than $1,500, on the strength of their upcoming paycheck.
Just as the name suggests, repayment of the funds is to be done on the next payday of the borrower. It is simply meant to cover immediate or emergency expenses that cannot wait till your paycheck arrives. Since lenders bear so much risk by giving payday loans, you can always expect to get triple-digit annual percentage rates on your loan amount.
Unlike installment loans, payday loans are heavily regulated. Some states prohibit them completely, while others limit the possible loan amounts you can borrow or restrict lenders from charging exorbitant interest rates.
On the other hand, installment loans are a rather general term for all types of funding that allow you to make repayment over weekly or monthly installments. Most times, installment loans come in the form of personal loans where you can take out as much as $35,000, depending on your lender.
Borrowers usually get as much as 12 to 84 months to completely repay their installment loans. This type of funding could either be secured or unsecured. If it is secured, you would need to provide a collateral, but where it is unsecured, you may need to have good credit to secure a funding opportunity.
Factors that Differentiate Payday Loans from Installment Loans
There are many factors that help us understand the distinction between payday and installment loans. Many of these factors are general loan concepts, but the way they apply to each of these different loan types differ. Below are some of the important differences between payday loans and their installment counterparts.
Places that Offer Them
Installment loans are quite popular among borrowers. Nabila Yusuf at WeLoans, a financial writer with rich loan experience, comments that this type of loan comes in various forms, and as a result, it is usually available across many forms of lending platforms.
Personal installment loans, for instance, can be gotten at online lenders, credit unions or even traditional banks. Other forms of installment loans like auto title loans or pawnshop loans are available from specific lenders.
Payday loans are usually gotten from designated payday lenders. These lenders are online or walk-in stores that focus on providing payday loans. However, both installment and payday loans are available from reputable brokers like WeLoans.
One of the major differences between payday loans and installment loans is the loan amount. Many states put a cap on how much its residents can take out as a payday loan. Across the country, most payday loans will be less than $1,500.
On the other hand, there are barely any limits to how much you can borrow as an installment loan. The loan amount range for an installment loan will usually be between $5,000 and $100,000.
Payday loans attract a very short repayment period, usually within the time frame that the borrower will receive their paycheck. Most lenders expect you to pay back the full loan amount at once between two to four weeks.
However, the case is different with installment loans. As the name implies, you will need to pay a designated amount with interest in monthly installments till you cover the full loan amount. These repayment periods can span between one to seven years.
Annual Percentage Rate
Perhaps the most important distinction between payday loans and installment funding options is their annual percentage rate (APR). The APR is a combination of all the fees, interest rates and charges on a loan. For a payday loan, this can get as high as 200-400%, depending on the lender. However, the maximum possible APR on a personal loan is usually around 36%.
Pros and Cons of Payday Loans
Not only are payday loans very popular among borrowers, but they are also quite controversial too. Many people debate whether payday loans are a good option or not. Below are some of the most common advantages and disadvantages of this type of loan that everyone should be aware of.
- Payday loans are very easy to access and offer quick funding.
- This loan type is a very good option for bad credit borrowers.
- Payday lenders typically have less stringent requirements and provide fast approval.
- Payday loans are always very expensive, with an average APR of 400%.
- You cannot build credit even if you repay your payday loan on time.
- The repayment period for payday loans are usually too short and can trap borrowers in a debt cycle.
Advantages and Disadvantages of Installment Loans
Many borrowers believe installment loans offer better financial prospects than most other loan types. This is usually because it helps them spread payment for their loans compared to short term funding options. Below are some other benefits of installment loans as well as important cons.
- Installment loans can be very useful for large scale financial needs
- Borrowers can make repayment in predictable sums over a longer period, thereby reducing the chances of being stuck in a debt cycle.
- You can build your credit by repaying installment loans early.
- Borrowers with a bad credit score may get way higher interest rates.
- Most installment loans charge origination fees and several other discretionary payments.
Verdict: Which Loan Option Should I Go For?
Choosing between a payday loan and an installment loan can be a difficult choice. However, you may need to consider your financial circumstances and the amount you need before making a decision. If you have a bad credit and only need a small amount of money, payday loans may be your best shot. Regardless of which loan you choose, ensure to apply from a reputable broker like WeLoans. That way, you’ll find the best offers and choose one with the most favorable repayment terms.