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Payday Loan vs Installment Loan: Best Differences

Payday loans often have high-interest rates and short repayment periods, which may lead to a cycle of debt. Meanwhile, even with a bad credit score, you can still get better installment loans, the rates may be higher, but it is still a better option.
Payday Loan vs Installment Loan: Best Differences
While a comparison of payday loan vs installment loan would find that both are personal loans, there are still significant differences between them.
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In today’s fast-paced world, many individuals face financial challenges at some point. Unexpected hospital visits, car repairs, or any other emergency expenses — the reasons quick and sudden cash is needed can be many and varied. Payday loans and installment loans are popular options people often consider during hard times. In this blog, we learn more about payday loan vs installment loan and examine their pros and cons. Furthermore, we discuss the difference between a payday loan vs installment loan and which one you should choose as per your needs.

What is a Payday Loan?  

Payday loans, called cash advance loans, are short-term borrowing options with repayment terms around the borrower’s next payday. It is a small loan, generally less than $1000 depending on your state, and is easy to qualify for. The application process for this type of loan is quick and straightforward. Payday loans may sound like the best option in the market to meet your emergency cash requirements, but they also have some downsides. 

Pros: 

  1. Easy to access: The best thing about payday loans is their easy access. Unlike most traditional loans, which require a lot of paperwork and credit checks, you can apply for payday loans online and get the money on the same day.
  2. Less Requirement: Most borrowers are attracted to payday loans because they often require low criteria for qualification. Even people with bad credit scores can apply and get the loan amount.
  3. Unsecured loan: Borrowers do not need to lend money against collateral, such as a car or property. The lender may ask you to write a check later or request permission to deduct money from your account on your payday electronically or once there is cash flow in your account.

Cons:

  1. High interests:  Payday loans are expensive. Lenders may charge interest up to a 78% annual percentage rate (APR). 
  2. Debt trap: Since payday loans come with high-interest rates, it may become difficult for borrowers to repay the amount by the next payday, resulting in a late penalty or taking another loan to repay the previous one.
  3. One lump sum payment: Lenders may ask to repay the loan amount in one payment, making it difficult for borrowers to repay as the amount may be a considerable portion of their paycheck.

Beem can help you find, compare options and choose the best personal loan for you to meet your needs.

What is an Installment Loan?

Installment loans are a broad category that involves car loans, mortgages, student loans, and personal loans. They are long-term loans and require credit checks, and borrowers need to pay a fixed amount of money over a period decided by the lender. Each payment made by the borrower includes a certain portion of the principal amount and the remaining towards the interest on the debt.

Like every coin has two sides, installment loans have their fair share of pros and cons. 

Pros: 

  1. Finance big purchases: With installment loans, you can manage your large expenses, such as buying a car or a property or starting a new business. Depending on your credit score, you can get a loan approved for up to $100,000 with lower interest rates. 
  2. Improved credit score: Your payment history makes up 35% of your credit score, so if you make timely repayments for your installment loans, you can improve your credit history.
  3. Fixed Payment Amount: Unlike your credit cards, the repayment amount and interest rates stay the same for each payment towards the loan, which makes it easier to maintain a budget for those payments.

Cons:

  1. Fixed tenure of the loan: Your monthly payment amount is fixed, so if you face an unexpected financial crisis, you won’t be able to vary the amount for that payment. 
  2. Can affect credit score: If, for some reason, you fail to make the payment, then it can adversely affect your credit score. Payment delays may also come with penalties. 
  3. Prepayment penalties: If your financial condition has improved compared to when you applied for the loan, consider closing your loan before the tenure ends to save the amount you would have paid on interest. Some lenders may charge prepayment penalties to compensate for the loss on the interest they would have gotten from your tenure. 

Payday Loan vs Installment Loan: What’s the Difference?

FeaturePayday LoansInstallment Loans
Loan amountLess than $1,000Up to $100,000
Repayment TermOne lump sum amount on your next paydayPaid over several months or year
Interest Up to 400% may vary depending on your stateLower than payday loans but varies by your credit score
Credit checkNoYes

Also Know About: How to Get Installment Loans for Bad Credit

Payday Loan vs Installment Loan
Payday Loan vs Installment Loan: Best Differences 2

Payday Loan vs Installment Loan: Which to Choose?

Between payday loan vs installment loan, installment loans are almost always better. Why? Because installment loans allow you to borrow large amounts of money, up to $100,000, a payday loan is a small loan with a short repayment period. Installment loans offer lower interest rates compared to payday loans. In addition, the repayment of the loan amount is equal over loan terms, whereas you need to pay a lump sum from your next paycheck toward the payday loans, which could be a considerable portion of your paycheck. 

Although a failure in repayment for both loans has adverse effects, any defaults on your installment loans can significantly affect your credit score. In contrast, default on payday loans may result in high penalties, or you may even need to borrow more money to roll it over, which may get you in a debt trap. 

Also Know About: What Are the Types of Installment Loans?

Conclusion

In conclusion, financial hardships can arise unexpectedly in an individual’s life, and taking a loan can help you face those hardships. That said, you should consider these factors before taking payday loans. While it might seem quick and easy, payday loans often have high-interest rates and short repayment periods, which may lead to a cycle of debt. Even with a bad credit score, you can still get better installment loans, the rates may be higher, but it is still a better option than payday loans. Therefore, choose between payday loan vs installment loan as per your financial needs.

If you are looking for a small loan to manage emergencies like paying bills, gas, and groceries with no income restrictions and due dates, try Beem’s personal loan feature to get all the information you need on personalized rates and explore loan options ranging from $500 to $100,000, without impacting your credit score! 

FAQs

1. Can I Get an Installment Loan With a Bad Credit Score?

Yes, you can still get installment loans with bad credit. You can get installment loans that suit your preferences with proper research and exploring different options.

2. Which Loan Is Better for Managing Financial Emergencies?

Installment loans are generally better as they provide more flexibility and manageable repayment terms.

3. What Should I Consider Before Choosing Between a Payday Loan vs Installment Loan?

Consider factors such as your financial situation, repayment ability, and total cost of borrowing.

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Team Beem

Team Beem

Team Beem brings you the latest in the world of personal finance to you. From tips and tricks on how to manage money to how to get cash for emergencies, Beem is your destination for all the information you need to be smart about your money.

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This page is purely informational. Beem does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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