Life is not always simple. Sometimes your personal expenses far outweigh your income, and it is times like these that necessitate a financial emergency. That is why it is critical to understand payday loans and installment loans.
They are both interesting loans for bad credit borrowers
Because they both have high-interest rates, these two are frequently lumped together in the same category. This is because the borrowers who choose these typically have poor credit and/or low income. Such low-credit borrowers may not be able to obtain cheaper forms of consumer credit, such as credit cards or home equity loans, from credit unions or banks.
These two types of loans are frequently the only way for most people to emerge successfully from an unexpected cash crunch.
Let’s look at the different aspects of these loans to see how they differ from one another.
What is a Payday loan?
The payday loan is regarded as a quick loan solution to a sudden emergency expense or a medical problem due to its short repayment period and small amount of money.
Payday loans can be obtained from an online payday lender and are usually approved within a few minutes if the correct information is submitted. Applicants must follow the following rules in order to qualify for payday loans:
- be at least 18 years old
- have a steady source of income
- detain a bank account
What is an Installment loan?
The installment loan is a type of personal loan that involves a larger sum of money and allows the borrower to repay the amount in gradual installments over a longer period of time.
This type of loan is typically used for short-term financial problems or long-term struggles, such as a chronic medical illness. However, because they allow for a larger sum of money, the borrower must demonstrate their worth and credibility in repaying the loan on time. This entails meeting certain criteria, such as:
- the existence of a valid checking account
- a consistent source of income
- meeting the required minimum salary
No credit check needed
Nevertheless, if you fulfill all the necessary requirements, installment loans require no credit check, which means that you’ll most likely get the approval from the lender.
What are the Differences Between These Two Types of Loans?
1. Loan amounts
The principal distinction between the two loans is the loan amounts. While payday loans are typically for small sums of money ranging from $100 to $1500, installment loans can range from $200 to several thousands of dollars.
This is simply because the lender has detailed information about the borrower, and the latter is a good candidate for a loan because they already have some sort of security or asset to prove their ability to repay the loan on time.
Installment loans are larger but more difficult to obtain
Thus, installment loans are permitted only when the lender is completely confident in the borrower’s ability to repay the loan.
2. Payment period
Payday loans, as the name implies, are short-term unsecured loans, which means the borrower has only about a month or so to repay the entire amount. These loans are due to be paid back as soon as the borrower receives their next paycheck. The short payment period is also due to the fact that payday loans are typically small, easy to repay, and carry higher risks for the lender.
Installment loans, on the other hand, are classified as long-term loans due to the longer payment period. It could be anything from a few months to a few years (up to 30 years), depending on how much money was borrowed in the first place.
3. Payment Method
Installment loans, as the name implies, are repayable in installments. During the loan term, a set amount of money is transferred to the bank at monthly intervals. As a result, it is not paid in full at once, but rather as a monthly payment that continues until the entire loan plus interest is paid off.
Payday loans, on the other hand, are repaid with a post-dated check issued to the lender at the time of the loan. Repayment can be made electronically once the borrower’s paycheck has been cashed and the funds have been transferred to his bank account.
4. Loan fees & Charges
Fees for payday loans can be calculated using a specific term known as annual percentage rates, or APR, which can reach 400% at times. To put it another way, payday loans have a higher interest rate than installment loans.
The latter has a lower annual percentage rate ranging from 25 to 100%. Other financial costs, such as credit insurance premiums, can be paid in monthly installments in addition to interest.
5. Loan security
This is one of the most significant distinctions. Payday loans are typically more risky than installment loans. This is because the majority of installment loans are secured by the borrower’s personal property. The collateral could range from real estate and automobiles to electronics, jewellery, and even power tools. This spreads the risk and gives the lender a better chance of getting their money back if the borrower fails to repay the loan amount later on.
Payday loans are riskier for the lender
Payday loans, on the other hand, carry a higher risk, especially when you consider what is required prior to the approval process. To even be considered for a payday loan, you must have recent paychecks to prove your employment status and the fact that you have a consistent source of income.
As payment, you may be required to produce a post-dated check cashed by a previous loaner. The lender has no other way to get the money besides this check. However, the fact that borrowers are only given small and easily repayable loans reduces the risk slightly.
Which type of loan is better?
Finally, the type of loan you choose will be determined by your unique situation and preferences. Many people prefer to take out a short-term loan in order to pay it off faster and, in the process, improve their credit score. Then there are a few others who dislike the idea of devoting their entire upcoming paycheck to paying off current debts and would rather use the subsequent months to gradually repay the pending loan.
No credit check is required for both types of loan
One thing to keep in mind is that even if your credit score is low, you can apply for either type of loan with no credit check and have an equal chance of being approved for both. However, never take out more than one loan at a time, as this can severely complicate your finances and unleash a slew of future problems.
Look at the risks before choosing
To summarise, if you need to borrow more than a payday loan allows, a personal installment loan is probably your best option. Remember to consider your current needs as well as future financial risks by reviewing the loan terms. If you are still unsure, you can always apply for multiple types of loans and then choose the one that best meets your needs.