Payday vs Installment Loans

Payday vs installment loans: What’s the Difference? – Generally, Payday vs. installment loans are very two different borrowing options. And these two options can be accessed when you need emergency financial help. They help provide funds quickly when you are faced with unexpected financial needs.

Payday vs installment loans
Payday vs installment loans

Before applying for Payday vs installment loans, it is very important to understand the difference between the two. These differences can help you know which of the loan options is better for the financial situation at hand. In this guide, we will walk you through the difference between Payday vs. installment loans. And what you need to consider before applying for a loan.

Payday vs Installment Loans

Payday loans are very easy and fast to get with few qualification requirements. They come in amounts up to $500 and borrowers must pay them back before the next payday. However, these loans often come with excessive fees, which equates to a very high annual percentage rate. This makes the loan very difficult to pay and puts borrowers in a very bad situation

Installment loans on the other hand are paid back in monthly installments over a fixed time, usually at fixed interest rates.  Just so you know, they are commonly personal loans, which offer funds between the range of $1,000 – $100,000. While car loans and mortgages are referred to as installment loans, they are not compared to payday loans. So we do not refer to them in this guide.  Below are the main differences between these two options

Differences Between Payday vs Installment Loans

Payday vs installment loans is very similar because they provide short-term funds when you need money quickly. However, you need to know that there are critical differences between these loan options. And one of the biggest differences between these two is how you repay them. Installment loan repayments are due in small amounts over a long period while paydays are repaid at a time, mostly on your next payday.

          Payday loans          Installment loans   
Low requirements needed for approval More complicated application requirements
Low amounts ( about $500)    Higher loan amounts of about ($1,000 -$100,000)
High risk     Low risk
Unsecured and do not require you to have collateralVaries by your credit score but is always lower than payday loans
Secured and it requires borrowers to have collateral  Varies by your credit score but always lower than payday loans
Repaid in one lump sum on the next paydayRepaid over several years or month
Steeps of 400% APRLower APR of 12% to 30%

Note; both these loans have their risks but installment loans are very risky compared to payday loans.

What Are Payday Loans

Payday loans are loans that provide you with quick funding to cover up for your short-term financial situation. This loan comes with a very huge amount of risk because of its high-interest rates that have to be repaid on your next payday. Paydays are often personal loans which means they are unsecured and collateral is needed.

Mostly, they are marketed toward borrowers with poor credit scores, lower incomes, or very difficult financial issues. Lenders do have limited qualification requirements and funds are easily accessible making them high-risk ventures for lenders.

As a result of this lenders apply high fees and rents. And this often results in people trapped in a debt cycle. Because they will need to take another loan to pay off the first one. With this loan option, you will need to provide a postdate check or deposit information for the collection of the payments on the payday. You must repay this loan before or on the next pay period, to avoid accumulated fees.  You can apply for this loan from online lenders or storefront vendors.

Requirements to apply for Payday Loan

The payday loan application process is easy compared to the installation loan process. The loans are made available to most people and to apply, you will need to meet these requirements

  • You will need to provide proof of residency
  • 18years and above
  • Contact information such as a valid email address or phone number
  • Evidence of reliable income
  • Valid identification such as social security number, government-issued photo identification, or taxpayer identification number

Although this loan is very easy and fast to get, it can be very difficult to pay back. The fees are very high to cover for lender’s risk. Also, keep in mind that lenders do not report to credit bureaus but they report to collections which may affect your credit.

What are Installment Loans

Installment loans are personal loans that come from credit unions, banks, or online lenders. They are the type of loans that you make monthly payments for such as mortgages and car loans. These loans are between a few hundred dollars to $10,000 and can be unsecured and mostly secured. Many lenders allow borrowers to prequalify online with a credit check. This process enables you to check your potential rate, loan amount, and repayment term without touching your credit score.

Just so you know, you can pre-qualify with most lenders to gauge your chances of approval before you apply. However, once you apply for the loan, the lender will do a thorough hard credit check. Mostly, your loan amount will depend on your credit history and income. The interest rate on this loan usually ranges from 4% to 36%.

Requirements for an installment loan

To apply for the instalment, here are the requirements you need to apply to get approved;

  • A minimum credit score of at least 670
  • A stable source of income ( documents such as bank statements, w-2 forms, or pay stubs will be required to verify your income
  • Documentation such as address, history, identity, income, social security number or government ID, pay stub, and utility bill.
  • The reason for the loan will be requested to know if it is worth the risk of lending

To get this loan, you can easily apply in person or online. After you apply, the lender will check your financial information and application to know whether to approve the loan

Major Benefit Of Payday vs Installment Loans

A payday loan is not the only option available for you to get fast cash if you are facing financial hardship. You could also qualify for an installment loan with lower borrowing costs and a flexible repayment schedule. Although short-term loans can seem like the best solution to resolve your financial problems, it’s advisable to research other options. You can get the best alternatives to get your finances on track. Some best alternatives include; cash advance apps, credit cards, or friends and family.