Payday Loan vs. Installment Loan: What is Better?

Posted on April 10, 2024 by Terryl Payne

Different loan choices can be confusing when it comes to borrowing money. There are so many options, but two standard loans people consider are payday loans and installment loans. Both give money for personal needs but work differently and have different rules and outcomes. Understanding what sets them apart is critical for anyone seeking financial help.

Payday loans, also called paycheck advances, are short-term loans usually due when the person gets their next paycheck. Installment loans give people repayment plans that are more organized and easier to handle. This article explores payday loans vs. installment loans to help you decide which is right for you.

Table of Contents

1. Installment Loan vs. Payday Loan: A Quick Comparison Table
2. What is an Installment Loan?
3. Payday Loan Definition
4. Installment Loan vs. Payday Loan: Which Better Fits Your Needs?
5. Alternatives to Payday Loans
6. Bottom Line: Difference Between Payday Loans and Installment Loans

Installment Loan vs. Payday Loan: A Quick Comparison Table

What is an Installment Loan?

An installment loan allows you to get a lump sum upfront and then pay back the amount you borrowed plus interest over time in monthly payments. The amounts vary between $1,000 and $100,000; you have longer to pay it back, from 3 to 60 months or more. Also, the interest rates are usually lower than those of payday loans. Installment loans can be more affordable if someone needs a good amount of money for an extended time.

An installment loan allows you to access a lump sum upfront and pay it back over time in scheduled payments. Usually, they are made every month and go toward both the original amount borrowed and interest, which is the money’s cost. Installment loans let you spread out repaying instead of paying everything back at once, like with payday loans. They are more manageable for people.

Installment loans also have fixed rates, so your monthly payments remain unchanged. The loan examples are mortgages, car loans, personal loans for more significant expenses, and student loans. You can get them from a bank, credit union, or online installment lenders.

These loans help you build a good credit history because the lenders report your monthly payments to the major credit bureaus. However, they also have stricter requirements and longer funding times.

Payday Loan Definition

A payday loan is a short-term financial product that helps you get money before your paycheck. Consumers use a payday loan to cover surprises or tide them over between paychecks. The name comes from repaying with your next pay. Maybe you’ll ask yourself, “Is a payday loan an installment loan?” the answer is no. These two loan products are different.

Unlike installment loans, a payday loan repayment timeline is up to your next payday. You agree to pay back the entire payday loan plus fees and interest in one lump sum. It’s made using a postdated check or by them automatically taking the money from your account. Depending on the state’s regulations and payday lender, the amount you can get ranges from $100 up to $1,000 or less.

You can get a payday loan online or in-store. Payday lenders usually approve applications quickly without much paperwork or a credit check through major credit bureaus. Then, you often get the money on the same day or in 24 hours.

A payday loan is notorious for high rates and costs. Annual percentage rates can top 400%, making them one of the priciest ways to borrow. Payday lenders might also charge origination fees or rollover fees if you extend the loan.

Installment Loan vs. Payday Loan: Which Better Fits Your Needs?

Payday and installment loans may seem similar at first glance, but there are some key differences to be aware of. Most payday loans offer smaller amounts, usually enough to tide you over until your next paycheck. Installment loans let you borrow higher amounts, stretching into the thousands.

They also have different times to pay back. Payday loans are due quickly, right around your next payday. Installment loans give you way more flexibility, with repayment terms ranging from months to years. You make regular payments each month rather than one big balloon payment.

Payday loans stick to you with high rates. It is risky borrowing. Personal installment loans usually have much lower interest rates, making the debt way more affordable.

A payday loan is better if you need fast cash for an unexpected expense before payday. However, an installment loan is likely a better option if you need a larger one and have a decent credit score.

Alternatives to Payday Loans

Loans from most payday lenders seem like an easy fix because you can get money fast. But their high interest rates are risky. They can lock you into debt forever. Thankfully, there are other ways to get quick cash that will keep you from busting.

Payday Alternative Loans

Most payday alternative loans have lower interest rates than payday ones. Payday loans usually come with high annual percentage rates (APRs), sometimes over 300%, while rates on most PALs don’t exceed 28%. You can borrow up to $2,000 with a maximum repayment term of 12 months.

Title Loans

Title loans, considered also short-term loans, let you borrow more since they use your car as collateral. You’re putting your wheels on the line, and if you can’t repay that loan on time, you may have long-term problems. Payday loans can do it, too, but you don’t get as much money upfront. If you need cash, think hard before taking out a car title loan. Things can worsen fast if you aren’t careful, so you need to consider all the what-ifs.

Credit Card Cash Advances

Credit card cash advances let you get money fast. You can immediately take out a cash advance from an ATM or bank using your active credit card. Credit card advances may provide quick financial relief if you use them smartly. But even with the higher fees and rates compared to regular purchases, credit card cash advances might become cheaper in the long run compared to payday loans. Just aim to pay back the balance fast to keep the interest costs low.

Friends or Family

Borrowing money from friends or family can be better than using payday loans with high interest rates. Your friends and family won’t charge you interest, or they’ll only ask for a small amount. They also tend to be more flexible about paying back the loan. If you’re struggling, they may give you more time or let you adjust the schedule.

Reputable lenders do a credit check before approving a loan, which is terrible if your credit isn’t good. Your friends or family probably won’t look at your credit score before lending you money. Thus, it’s often easier to borrow from people you know if you’ve had debt issues or your credit score isn’t excellent.

Bottom Line: Difference Between Payday Loans and Installment Loans

It is crucial to understand the difference between payday loans and installment loans when trying to make good money choices. While payday lenders give you fast cash when you need it, they work differently when you need to pay them back.

Additionally, you pay high interest and fees that can trap you in debt forever. Installment loans spread out your payments over time, so they are easier to handle. However, they can cost you more in the long run. You should be careful with those, too, or you could end up underwater fast.

Payday loans should be your last choice because they nail you to the wall with costs and wreck your finances. If you’re struggling, try a personal loan or talk to a credit counselor first. Educating yourself about money and asking for financial assistance is how to deal with problems healthily. Do that, and you can get through tight spots now and have a brighter future.

See also:

1. What Do I Need for a Payday Loan?
2. Exploring Payday Loan Alternatives: Finding Better Financial Solutions
3. Understanding the Basics: A Guide to 13 Different Types of Loans

References:

1. From Payday to Small Installment Loans
2. Payday Loans vs. Personal Loans: What You Need to Know