Payday Loans vs Installment Loans: What’s the Difference?
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 $1,000 in their savings account.
Throw in an unexpected life event – a hospital visit, a car accident, or even an appliance breaking down – and most Americans end up in a cash crunch.
If you have very little in savings and life throws a wrench in the works, making ends meet can be tough. This is where payday payday loans Delta OH no credit check 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 etc. – 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’ll make a fixed monthly payment over the loan term. It might be three years for a car loan, or 30 years for a mortgage loan. A personal installment loan is usually around 12 months.
Interest rates on personal installment loans will be MUCH more favorable than on any payday loans – even if you have questionable credit.
Remember, all of this info is about real personal installment loans – not “short term installment loans,” which is just a sneaky euphemism for “payday loans.”
Payday loans are much smaller loans, usually less than $1,000, that are due on your next payday (hence the name). Often you will write a postdated check or provide 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 roll over 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 that there are almost always 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 vicious payday loan cycles and there are few ways out.
Payday loans don’t require a credit check, which makes them super easy – too easy – to obtain. Avoid payday loans at all costs, and if you do take one out, be sure that you can pay it in full. Otherwise, you’ll end up in a world of hurt.
Which is Better: Payday Loan or Installment Loan?
If you can qualify for an personal installment loan, 99% of the time you should choose that instead of taking out a payday loan. That payday loan will almost certainly lead to a mountain of debt, collection calls, lawsuits, and potentially even bankruptcy. When you’re out of the immediate crisis, focus on trying to save money instead.
One More Option: Cash Advance Apps
You may have seen the TV ads for these apps. These are similar to payday loans – they’re sometimes even called paycheck advance apps – but there are a few key differences. There are no physical storefronts and they don’t usually charge interest. Instead, they ask you to pay a “tip.” They lend small amounts that are repaid from your next paycheck.
Requirements are minimal. Users typically only need a steady paycheck, a checking account with direct deposit, and a way to verify employment. They don’t usually check borrowers’ credit.
Some will charge a small monthly membership fee, ranging from $1 to $10 a month depending on the company and lending services you choose. Dave, Earnin and Brigit are good choices.
The Bottom Line
If you do decide to take out a payday loan, avoid tribal loans, and be sure that you can pay it in full. Definitely don’t take out a second payday loan. It’s not worth it. Instead, check out some cash advance apps, then, once your current crisis is over, focus on creating a small emergency fund.