Borrowing money can be overwhelming. If you’re looking into taking out a loan, you might be considering a payday loan or an installment loan. But which one should you choose, and why?
Although they serve similar purposes, these loans have unique differences. Payday loans are short-term loans usually paid back on the borrower’s next payday, while installment loans let borrowers repay the loan over a longer period with several payments.
Payday loans provide quick access to cash, making them an excellent choice for urgent financial help. In contrast, installment loans offer predictable fixed repayment schedules and lower interest rates due to the longer payment period. These loan options provide flexible solutions for people needing to borrow money based on their specific financial situations and preferences.
Discover the similarities and differences between payday loans and installment loans in this comprehensive analysis.
What is a payday loan?
Payday loans are short-term loans intended to help individuals cover any unexpected expenses until their next payday.
What is an installment loan?
An installment loan is a long-term loan taken out and then paid back in regularly scheduled installments. These loans are intended to dole out large sums of cash and are not revolving loans.
Why you should take out a payday loan
So, let’s have a look at the argument for payday loans. These loans are incredibly easy to acquire, and most applicants are easily approved. Lenders do not check the borrower’s credit, and the entire transaction is quick –, from start to finish, the loan will last for a maximum of three months.
If you’re looking for quick money, quick payback, and easy access, a payday loan is a way to go.
The argument for installment loans
Installment loans have one great capability: you can borrow a lot of money with one. Installment loans are a good choice if you’re looking for a big lump sum of money.
They are also paid back over a longer time, with regular payments. This can make paying back feel a little less stressful and easier.
Why a payday loan might not be for you
While payday loans have some pretty awesome benefits, there are a couple of things you want to keep in mind before signing on the dotted line. First, if you default on the loan, the interest rates on these loans are sky-high.
So, you’ll want to make sure you will be able to pay it back on time. Second, these loans, unfortunately, can’t help you build credit, so if you’re trying to bump up your credit rating, you might want to go a different route.
Why you might want to avoid installment loans
But, everything isn’t perfect when it comes to installment loans either. When you pay back the loan at each installment, only a portion of that payment goes against the actual money you borrowed.
The other portion, and depending on the size of the loan, it can be pretty large, is going strictly toward interest. By the end of your loan, you’ll have lined the bank pockets pretty nicely. Not to mention, banks can have you jumping through hoops trying to get approved for a loan.
How to decide
There are some great positives and worrisome drawbacks to each kind of loan, and you might even be feeling more confused than when you started. Not to worry, the best thing you can do is to ask yourself the following questions:
How much money do I need?
If you need less than $1,500, opt for a payday loan; if you need more, go for the installment.
How quickly do I need the money?
If you need money right away, go for the payday loan; you could consider an installment loan instead if you have some time.
Can I pay this back right away?
If you just need a loan for a short period, snag a payday loan and get it out of the way; if you know you won’t be able to pay it back, an installment loan might be the right path for you.