Payday Loan vs Installment Loan – The Differences Explained
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Do you weigh the pros and cons of a personal loan versus an installment loan? Each type of loan has bonuses and drawbacks.
For example, payday loans generally have shorter terms than installment loans. In addition, installment loans can take different forms. As a result, you may be faced with different standards and minimum credits.
Overall, payday loans are straightforward and have fewer requirements. However, it is much easier to default on a payday loan.
This article will help you decide between a payday loan or an installment loan. Read on to find out more.
A payday loan is a short term loan that carries a high interest. Borrowers typically pay off the loan with a large portion of their next paycheck. Payday loans are also called cash advances.
The most notable gain is that payday loans come with fewer requirements. In general, cash advances have the following parameters:
- You must be 18 years of age or older
- You must have a bank account
- You must have a stable income
- You have a social security number
Additionally, most lenders do not take credit scores into account when approving an application. In addition, payday loans are generally not credited to you and will not affect your credit profile. Plus, payday lenders usually don’t check your credit.
Cash advance lenders also offer quick financing. In most cases, you can receive your money within 24 hours. With installment loans, you may have to wait longer.
Payday loan applications typically take less than five minutes. Once you apply, you will also get an immediate decision.
Finally, payday loans are unsecured loans. This means that you do not need to pledge any collateral to qualify. Other loans may require collateral. The collateral can be your house, your car or your stocks. If you don’t repay the loan, the lender can seize all the pledged assets.
Payday loans are generally high interest rate loans. Some states allow lenders to charge up to 400% or more. For this reason, many consider payday loans to be predatory loans.
That said, you could live in a state that caps interest rates on payday loans. In many cases, interest rates can range from 4% to 36%.
Additionally, payday loans will not strengthen your credit since creditors do not report them to major credit bureaus. If you want to create credit with a loan, consider installment loans.
What is an installment loan?
An installment loan is a predetermined amount that you will pay back in installments. The installment plan depends on the discretion of the lender.
However, lenders usually offer a monthly payment plan. The term of installment loans is longer than that of payday loans, which means that you will have more time to repay the money.
Principal and interest will determine your payment, including the payment schedule. Installment loans come in several forms:
- Student loans
- Auto loans
- Personal loans
- Commercial loans
Unlike payday loans, installment lenders may have collateral requirements. However, you can find installment loans without collateral mandate.
Additionally, installment loans tend to have credit minimums. The minimum credit score depends on the type of loan you get and the loan standards.
- Examples: To get a mortgage, you generally need a minimum score of 620. For auto loans, many lenders do not accept scores below 600.
Since lenders will check your credit score, you should avoid applying for multiple loans at once. You can also find lenders who offer installment loans for applicants with lower credit. If your credit rating is low, check with online lenders as they are generally more flexible than other institutions.
Besides your score, lenders may have higher income requirements than payday loans. If you get a mortgage, for example, you will need a higher income compared to the income requirements of a payday loan.
In terms of interest rates, installment loans usually don’t charge exorbitant rates. Nonetheless, lenders can still charge higher interest rates, especially if you have bad credit.
Even if you have a lower interest rate, you could pay more in other ways. Installment loans can come with high fees and surcharges that could make your loan more expensive. To avoid high fees and rates, find a trustworthy lender.
The importance of interest rates
When it comes to interest rates, payday and installment loans work in different ways. Payday loans are fixed rate loans.
This means that the interest rate will not be charged for the life of the loan. Conversely, installment loans offer variable rate loans, the rate of which is subject to change as you make payments.
If you have a higher interest rate, the variable route may allow you to pay a lower rate in the future. The problem is, your loan could have a higher rate in the future.
You have no control over how the rates change because the rates change based on market indices. If you prefer stability, the fixed rate option is the best choice.
You can also find installment loans with a fixed rate plan. Choose a fixed rate loan if you have a lower interest rate or if you are happy with the original rate.
Payday Loan vs Installment Loan: What’s the Verdict?
The question of a payday loan vs an installment loan comes down to your needs. If you want a loan that doesn’t affect your credit, choose a payday loan. However, if you want to develop your credit, an installment loan is a better alternative.
Usually, payday loans come with higher interest rates, but the requirements are few. Installment loans tend to offer lower interest rates, but lenders impose more stringent parameters.
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