A loan can help you pay for things you want or need, and it can also help you out financially if you’re ever in a pinch.
When it comes to the myriad of products available, there are distinct differences between an installment loan vs payday loan.
Read on to learn more about these types of loans and their differences so you can make the decision that’s right for you.
The Basics of Installment Loans Vs Payday Loans
An installment loan is usually a long-term loan that allows you to make payments on an extended basis with specific rates and repayment terms. Auto loans, mortgages, and even student loans are some examples of installment loans.
When you apply, and get approved for, an installment loan, your payments should not increase. You’ll simply make the same payment each month until the loan is paid in full.
Generally, the higher your credit score, the lower your rates will be, and you’ll also get better terms like lower fees and payments.
You can use an installment loan for personal reasons, such as paying off your debt or helping a family member.
The Lowdown on Payday Loans
Payday loans are quite different from installment loans. A payday loan is a short-term loan, which means you won’t have much time to pay it off.
If you’re late, skip a payment, or go past the original terms of your loan, the fees and rates can be monumental.
To qualify for a payday loan, you don’t need to have a stellar credit score. All you need is to provide a recent copy of your pay stub, and most payday lenders will issue you a check on the spot. Some lenders may contact your employer to verify your income.
When you combine short repayment terms with higher interest rates, a payday loan may not be as appealing as an installment loan, at least for some people. Those who have little to no credit or bad credit may not qualify for an installment loan but should be able to get a payday loan without any issues.
What Is an Installment Loan?
Installment loans are loans acquired for a specific purpose at a specific dollar amount with a specific interest rate for a specific amount of time. They’re usually issued through a bank but can also be acquired through finance companies.
Installment loans are set up to be paid back through a monthly installment plan. The number of months is based on the size of the loan. For instance, a bathroom remodel may be set up for 12-24 months, and a car loan may be 60 or more months. A mortgage is a larger installment loan with most monthly payment plans being set up for 15-30 years.
To qualify for an installment loan, you’ll need to be at least 18 years old with certain income requirements based on the type and amount of the loan you’re requesting. Collateral, a physical asset worth at least as much as the loan amount, is often required for the lending agency to secure the loan as well.
Minimum credit scores are a common requirement and can affect your interest rate, and it can be difficult to acquire installment loans for bad credit. A better credit score usually means a lower interest rate. Your payments, whether on time or late, will be reported to credit bureaus so an installment loan is a good way to build your credit and improve your credit score.
What Is a Payday Loan?
A payday loan, also known as a cash advance loan, is usually acquired through a lending agency and is meant to be very short-term but often carries a high interest rate. In fact, most are designed to be paid in full at the time of your next payday, hence the name.
To qualify for a payday loan, you will most likely need to be able to provide the following:
- Proof of being at least age 18 years old.
- Proof of owning an active bank account.
- Proof of employment/source of income
- A valid social security number
The application process can be completed in as little as five minutes, and you usually get an immediate response. You can often receive your funds in less than 24 hours.
Most payday loan companies don’t check your credit to qualify you for a loan. The total amount borrowed can’t exceed a certain percentage of your regular paycheck. The entire loan plus interest and fees are expected to be paid at the time of your next regular paycheck. If you choose to make a minimum payment instead, more interest will be added to your balance.
Installment Loan vs Payday Loan: How Do They Stack Up?
When you’re looking at the details of an installment loan vs payday loan, it’s important to think about the pros and cons of each before you apply. In most cases, an installment loan will be for higher loan amounts than a payday loan. This is because installment loans allow you to pay over a much longer period of time.
Payday loan amounts tend to be smaller and may limit borrowers to the amount of their next paycheck. Most payday loan borrowers only need a few hundred dollars to make it to their next paycheck.
An installment loan can be secured, which means you are using your assets as collateral for the loan. One benefit of secured loans is that the interest rates are lower than other types of loans.
What’s the Verdict?
You’ll know exactly what you’re getting with an installment loan in terms of your monthly payment and rate. Once you’re approved, you won’t need to worry about the principal increasing or getting hit with crazy fees.
Payday loans can be difficult to pay in full for some borrowers. But if you need cash immediately, it is a quick and convenient solution for some.
Overall, installment loans are usually a better choice for most people. Between lower rates and better terms, those with a decent credit score should consider this type of loan. But if you need money immediately, a payday loan can get you out of a jam. Just pay it back quickly.
Once you know the difference between installment loans vs payday loans, you’ll be able to determine which product is right for you. If you can wait until your credit score improves, an installment loan is usually a better option.
Talk to a lender and find out what type of loan you qualify for today. If you need a convenient cash loan, visit our website today to find out more about how Jora works.