Looking to learn the difference between payday loans and installment loans? We’ll break it down for you.
When unexpected events come up, many Americans don’t have the cash to make ends meet. In fact, 58% of Americans have less than $1000 in their savings account.
Throw in an unexpected life event – a hospital visit, a car accident, or even an appliance breaking – and most Americans are in a cash crunch.
If you have little in savings and life throws a wrench in the works, making ends meet can be tough. This is where payday loans and installment loans come into play.
Both payday loans and installment loans are personal loans that can be used to help make ends meet. But what is the difference? Is one better than the other (spoiler alert: yes).
Installment Loans vs Payday Loans
Installment loans are a broad category that include mortgages car loans and other personal loans, and tend to be longer term and require credit checks. Payday loans are technically a type of installment loan, but with a much shorter payment term, higher interest rates, and no credit check required. The payday industry has adopted the term ‘short term installment loan’ as a way to try and avoid the stigma associated with payday loans.
An installment loan can include all sorts of loans – mortgages, car loans, boat loans ect – but the types of installment loans that are comparable to payday loans are usually labeled ‘personal loans’.
As with any installment loan, you get a lump sum of money upfront. Then, you pay a fixed amount monthly over the course of the loan. It might be 3 years for a car loan or 30 years for a mortgage. A personal installment loan is usually around 12 months.
Any legit personal installment loan will require a credit check and a fairly lengthy application process.
Interest rates on personal installment loans will be MUCH more favorable than on any payday loans.
Remember, all of this info is about real personal installment loans – not ‘short term installment loans’ which is just a euphemism for ‘payday loans’.
Payday loans are much smaller loans, usually under $1000 that are due on the next payday (hence the name). Often you will write a post-dated check or give access to your bank account so that the lender can withdraw the funds on your next payday.
The problem with payday loans is when you can’t pay them back. Lenders will allow you to rollover the loan, and pay on the next payday, with more interest. Usually they’ll throw in a few late fees as well.
The problem? The interest rates are extremely high – around 400% APR on average. Not to mention, there are often penalties and fees associated with the loan.
What happens is that the interest snowballs so fast that you end up in what’s known as the payday loan trap. Many get stuck in payday loans and there’s few options out.
Payday loans don’t require a credit check, which makes them super easy – too easy in fact – to obtain. Avoid payday loans at all costs, and if you do take one out, be sure that you can pay it in full or you’ll end up in a world of hurt.
Which Is Better: Payday Loan or Installment Loan?
This is pretty simple: anything is better than a payday loan.
If you can qualify for an personal installment loan, 99% of the time you should go with that over taking out a payday loan. Taking out a payday loan leads to a world of hurt including a mountain of debt, collection calls, lawsuits, and potentially even bankruptcy. Maybe try and save money instead.
Also, don’t fall for the term ‘short term installment loan’. It’s just a payday loan.