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Installment Loans vs. Payday Loans

These days, it seems you can’t turn on the news without hearing stories about payday loans and the risks they impose. But are they as bad as the talk? And what is the difference between a payday loan and an installment loan?

In this article, we’ll talk about the characteristics of payday loans versus installment ones. Each offers different advantages and disadvantages, so it’s up to you to decide which one is right for your situation.

Advantages of Installment Loans

An installment loan is what most people think of when they consider getting a loan. Usually, these loans are’ secured’ by real property, such as your car or home, which guarantees their fulfillment by holding those assets hostage should you default. In more recent years, however, lenders also have started offering unsecured installment loans, which do not attach any personal property.

The most significant advantage of an unsecured installment loan is that it provides the cash you need – and possibly more, as the loan amounts often are higher than the expenses for which you’re obtaining the loan. But installment loans allow you to repay the lender via a set number of installments, extending your ability to pay without requiring you to pay the entire balance in short order. Installment loans give you more flexibility by making the repayment plans more affordable.

Payments for installment loans often are monthly and predictable, with no surprises. Approvals usually get processed quickly, though not necessarily as fast as a payday loan. What’s more, the application process is typically rather simple, though more thorough and exacting than a payday loan.

Disadvantages of Installment Loans

Like payday loans, installment loans frequently come with hefty interest rates that reflect their unsecured nature. To obtain lower interest rates, lenders might require some collateral to secure them. Secure loans are ultimately somewhat less expensive than a payday loan and less likely to result in exacerbating your financial shortfalls.

Many installment loans also apply penalties for missing or late payments. These fees may make your loan even more expensive in the long run. So, it’s a good idea to make sure you pay on time, every time.

Advantages of Payday Loans

The most significant advantage of payday loans is that they are almost effortless to obtain. All you need is a steady job and an application, and you can walk out with money in hand. Their simplicity is a significant benefit if you need cash immediately.

Payday-loan providers review the information on your application, primarily verifying that you are currently – and steadily – employed because it’s your future paycheck that provides the collateral for a payday loan. These loans usually are for small amounts and designed to cover a sudden, unexpected shortfall for expenses like auto repairs or emergency housing.

But there are several severe disadvantages to payday loans you’ll want to consider before signing on the dotted line.

Disadvantages of Payday Loans

Payday loans are rapidly reaping a reputation for charging the highest interest rates of any lenders. In some circles, people call their rates and terms ‘predatory’. These high rates make payday loans a far more expensive option than virtually any other lending option. Still, it’s one that might be difficult to pass up if you need money quickly and, as a result, don’t have time to apply for a more traditional loan.

Recent years have marked a boom for payday lenders without much legal pushback from legislators. Some of the lenders out there aren’t as reputable as others. It’s sound advice to investigate any potential payday lender before you get involved, or you risk causing more economic damage to your fiscal situation than you can afford.

Finally, borrowing against your future paycheck can set you up for future failure. Payday loans require that their balances are paid quickly, using your next paycheck. And with their high interest rates, they end up being much more expensive to repay, resulting in a sharp shortfall on your next check, possibly triggering a Catch-22 and provoking another emergency loan.

Difference Between Installment Loans and Payday Loans

Historically payday loans featured exorbitant interest rates that can significantly exceed the amount of the loan and came due upon receipt of your very next paycheck. In these cases, a payday loan might fix your car, but it might also result in a great deal of financial trouble if you aren’t careful. Since about 2015, however, many payday loans have become more similar to installment loans, allowing you to repay them over more time.

Installment loans also have very high-interest rates, but they usually don’t exceed 100% of the loan. Even with high interest rates, paying them back in monthly installments makes them easy to repay over time and less likely to result in overwhelming debt – if you always pay the monthly amount on time.

Installment loans generally offer higher dollar amounts than payday loans, so they might help you pay off other debt or prevent other unforeseen economic problems.

Writer

Vivaan Marsh is a professional writer, editor and an expert in personal finance. Her career as a professional writer stretch for over 11 years. One of her passions in life is to help everyday families with there financial problems, making their life a bit easier and explaining complicated topics in an easy way. Read more >

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