No, a payday loan is not an installment loan. Instead, payday loans are cash advances that are given out for a short period of time to help borrowers deal with emergencies and offer loans for urgent reasons.
This guide will delve further into the nature of payday loans, and explain how they are different to installment loans.
What Is A Payday Loan?
Payday loans offer short term loans to those in need of fast cash. Customers facing unexpected costs such as medical bills, dentist fees, home repairs or funeral costs can borrow money quickly and efficiently. It is then intended that the borrower will repay back the loan within 2 to 4 weeks, once they receive their next paycheck on their upcoming payday.
Payday loans are designed to help individuals having difficulty accessing more traditional forms of credit such as bank loans. There are options for those with a poor credit score and it is often possible to get a same day loan.
Those looking to apply for a payday loan will need to qualify for certain eligibility requirements. This includes being aged over 18 years old, being a US citizen and having a live checking account for the funds to be deposited into. The borrower will also need to have a regular and stable form of income, to ensure they will be able to pay back the loan, and have a Driver’s license or a Social Security number.
What Is An Installment Loan?
An installment loan involves borrowing a lump sum of money such as $500, $1000, $10,000 or more. Installment loans are repaid in a series of equal regular payments over a set period of time, usually a few months or years.
According to USA.gov, “home and car loans represent the most common installment loans”. Other types of installment loans also include personal loans and student loans. Installment loans tend to be unsecured but it is possible to have a secure loan that requires collateral such as a car to qualify to borrow money.
|Examples of Installment Loans|
The interest rate on an installment loan is usually fixed, meaning that it will remain the same over the lifespan of the loan. For example, with a 25-year mortgage, a person would make monthly payments over the course of 25 years. A lot of installment loans are much shorter than 25 years, for instance a personal loan might be 1 or 2 years.
It is usually possible to pay off your installment loan early to save money on the interest. However, it is important to check the terms and conditions of your loan agreement before doing so as some lenders may charge a penalty fee for this.
Customer’s creditworthiness and payment history will determine the rates and terms they receive. Those with a lower credit score will most likely be offered higher interest rates than those with an excellent credit rating. So it may be sensible for the borrower to try to build a good credit score before applying for an installment loan.
Is A Payday Loan An Installment Loan?
The question of whether payday loans are the same as installment loans is a common one. The answer, however, is no.
A payday loan is not a type of installment loan, since the full amount of the loan is normally paid back in one lump sum when the borrower gets their next paycheck, typically up to a month after the loan has been taken out or in some cases a payday loan might be divided into 2 payment over 2 paychecks. In contrast, installments involve a longer loan term as it is paid back via multiple monthly payments over a period of time.
Installment loans also tend to have a lengthier application process since they are normally for a larger amount of money and over a longer term so therefore carry higher risk, meaning that applicants need to be more carefully vetted.
Is A Payday Loan Or An Installment Loan Better?
Whether a payday loan or an installment loan is better depends on the consumer’s borrowing needs. If the borrower is looking for a more short term loan, then a payday loan might be better, however if they need to borrow money for a longer period of time, then an installment loan could be more suitable.
Payday loans are intended to cover emergency and unexpected expenses that need to be paid quickly and so customers can benefit from a speedier approval process which is why they tend to be smaller amounts of money in a shorter amount of time than installment loans. Installment loans may come with a lower interest rate but you may have more interest overall since you are repaying it back over a longer time, from a few months to a few years depending on the terms, but smaller payments may be easier for you to fit into your monthly budget.
So whether a payday or installment loan is better depends on your financial requirements and how quickly you are able to pay it back. To some, installment loans may be easier to integrate into your monthly expenses than a payday loan if it is a lower repayment, but equally it may feel like a longer commitment and more of a financial burden than a payday loan.
When considering a payday loan versus an installment loan, you can calculate the interest and terms of both options to understand the total costs involved. If you decide to move forward with either type of loan, be certain that you will be able to afford the repayments as otherwise you could face late fees and a negative impact to your credit score.