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Are you weighing the pros and cons of a payday loan vs installment loan? Each loan type has bonuses and drawbacks.
For instance, payday loans typically have shorter terms than installment loans. Also, installment loans can come in different forms. As a result, you may contend with different standards and credit minimums.
Overall, payday loans are simple and have fewer requirements. However, it’s much easier to default on a payday loan.
This article will help you decide between a payday vs installment loan. Read further to know more.
What Is a Payday Loan?
A payday loan is a short-term loan that carries high interest. Borrowers typically pay back the loan with a large portion of their next paycheck. Payday loans are also called cash advances.
The most notable gain is that payday loans come with fewer requirements. In general, cash advances have the following parameters:
- You must be 18 years old or older
- You must have a bank account
- You must have a stable income stream
- You have a social security number
Additionally, most lenders don’t consider credit scores when approving an application. Further, payday loans generally aren’t reported to your credit and won’t impact your credit profile. Moreover, payday lenders typically don’t check your credit.
Cash advance lenders also offer fast funding. In most cases, you can receive your money in less than 24 hours. With installment loans, you may have to wait longer.
Payday loan applications usually take less than five minutes. Once you apply, you’ll also get an immediate decision.
Finally, payday loans are unsecured loans. This means you don’t have to pledge collateral to qualify. Other loans may require collateral. Collateral can be your home, car, or stocks. If you fail to pay back the loan, the lender can seize all pledged assets.
Payday loans are typically high-interest loans. Some states allow lenders to charge as high as 400% or more. For this reason, many consider payday loans to be predatory loans.
That said, you could live in a state that caps the interest rates on payday loans. In many cases, interest rates can range from 4 to 36%.
Moreover, payday loans won’t build your credit since creditors don’t report them to the major credit bureaus. If you want to build credit with a loan, consider installments loans.
What Is an Installment Loan?
An installment loan is a predetermined sum that you’ll pay back in installments. The installment plan depends on the lender’s discretion.
However, lenders usually offer a monthly payment plan. The terms of installment loans are longer than payday loans, meaning you’ll have more time to pay back the money.
The principal and the interest will determine your payment, including the payment schedule. Installment loans come in many forms:
- Student loans
- Auto loans
- Personal loans
- Business loans
Unlike payday loans, installment lenders may have collateral requirements. However, you can find installment loans without collateral mandates.
Also, installment loans tend to have credit minimums. The minimum credit score depends on what type of loan you’re getting and the lending standards.
- Examples: To get a mortgage, you typically need a minimum score of 620. For car loans, many lenders won’t accept scores below 600.
Since lenders will check your credit score, you should avoid applying for multiple loans at once. You can also find lenders who offer installment loans for applicants with lower credit. If you have a low credit score, check with online lenders, as they’re generally more flexible than other institutions.
Besides your score, lenders may have higher income requirements compared to payday loans. If you obtain a mortgage, for example, you’ll need a higher income stream when compared to the income requirements of a payday loan.
In terms of interest rates, installment loans generally don’t charge exorbitant rates. Nevertheless, lenders can still impose higher interest rates, especially if you have bad credit.
Even if you have a lower interest rate, you could pay more in other ways. Installment loans may come with high fees and add-ons that could make your loan package more expensive. To avoid high fees and rates, find a trustworthy lender.
The Importance of Interest Rates
When it comes to interest rates, payday and installment loans work in different ways. Payday loans are fixed-rate loans.
This means the interest rate won’t charge throughout the loan’s lifespan. Conversely, installment loans offer variable-rate loans, where the rate is subject to change as you make the payments.
If you have a higher interest rate, the variable route may allow you to pay a lower rate in the future. The problem is that your loan could have a higher rate in the future.
You have no control over how the rates change, as the rates change based on market indexes. If you prefer stability, the fixed-rate option is the best choice.
You can also find installment loans with a fixed-rate plan. Choose a fixed-rate loan if you have a lower interest rate or if you’re satisfied with the original rate.
Payday Loan vs Installment Loan: What’s the Verdict?
The issue of a payday loan vs installment loan boils down to your needs. If you want a loan that doesn’t affect your credit, choose a payday loan. If you want to build your credit, however, an installment loan is a better alternative.
Generally, payday loans come with higher interest rates, but the requirements are few. Installment loans tend to offer lower interest rates, but lenders impose stricter parameters.
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