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Payday loans vs installment loans
Life can be hard sometimes. Your personal expenditure and your income don’t match up at times. Maybe it could be an emergency and you need extra money. That’s why the knowledge of installment loans and payday loans is important. For most people, they may be the only options out of those unexpected financial situations.
These are loans given to a borrower and are expected to be paid back when the borrower gets his next paycheck. Payday loans involve small loan amounts. Payday lenders usually don’t require much personal information from the borrower except proof that the borrower is working somewhere and evidence that he is actually getting paid.
Repayment could be taking the check to the payday lender or the lender could electronically deduct money from the borrower’s account once his pay is in. There is also interest to be paid and it will be based on the agreement between the lender and the borrower. Generally, interest rates for a payday loan are quite high.
Installment loans are loans which a person who borrows the money is expected to repay over a set time period. Payment duration may range from 2 months to 30 years, depending on the amount of the loan and the terms of the bank. Installment loans usually involve large amounts, ranging from $100 to $100,000. Mortgages are also a type of installment loan.
The differences between payday loans and installment loans
Let’s look at different aspects of the loans to see how they differ from each other.
The two loans differ in terms of loan amounts. Payday loans are small amounts of money of $100 up to $1500. Meaning that it’s easier for the borrower to repay his loan. The small loan amount is also because of the high risk on the lender’s end. Minimal personal information is requested.
Installment loans, however, allow for larger loan amounts which could range from $150 to thousands of dollars. This is due to the well-stipulated information about the borrower that the lender, in most cases being banks, have. Thus, the lender is assured that the borrower is worthy of obtaining the loan and has the ability to repay it.
Payday loans are typically short-term loans, meaning that the borrower has only about 30 days to repay in full. These loans are repaid as soon as the borrower gets his next paycheck. The payment period is also because the amounts for payday loans are small and do not require a long time to repay.
On the contrary, installment loans have a longer time frame for repayment. It ranges from 6 months to even 30 years. This is because installment loans usually involve big amounts. Therefore, their tenures are also longer.
Mode of payment
Each of these loans has its own methods of repayment. Repayment of a payday loan can be done through use if a post-dated check that is issued to the lender when the loan was taken out. Repayment could be paid electronically, after the borrower’s paycheck has been deposited into their bank account.
Installment loans are repaid in installments. A specific amount is paid to the bank at monthly intervals throughout the loan tenure. Thus, it is not paid in full once. It is a monthly recurring repayment until the loan is paid up.
Loan fees and charges
With payday loans, the fees can be calculated as annual percentage rates (APR) which could go as high as 400%. This means that payday loans have a high-interest rate, higher than any other loan.
Installment loans have an annual percentage rate of between 25% and 100%. Apart from the interest, there are other financial charges like credit insurance premiums that are also paid in monthly installments.
Payday loans have a higher risk if one looks at what is required before loan approval. To qualify for a payday loan, the borrower has to produce past paychecks to prove that he has a regular job which pays him regularly and a post-dated check that is cashed in by the loaner as payment.
Apart from the post-dated check, the payday lender has no other way of getting back his money. This risk is slightly reduced by the fact that only small loans which are easily repayable are issued to borrowers.
Installment loans may be less risky. This is because most of the loans are secured by the borrower’s personal property, excluding real estate. The collateral could be cars, electronic items, firearms, jewelry (excluding wedding rings) and even power tools. By doing so, the risk is “spread out” and the installment loan lender has a way to get his cash back in case the borrower cannot repay the loan. Unsecured loans are also possible to get.
The differences let you decide which type of loan suits your needs better and which one you’re likely to get approval for.