When you find yourself in the position of needing a loan, figuring out the type of loan that’s right for you is oftentimes more difficult than it needs to be. While the benefit to every loan is mostly the same – quick money – understanding the logistics behind them can be tricky.
Two of the most common and easy-to-get loans are installment loans and payday loans. But what’s the difference?
A payday loan is a short term, open-ended loan that is very easy to obtain so long as you have a steady source of income and a bank account. They are also fast – applications take little to no time and you get your cash in hand in as little as a business day.
Payday loans get their name from the attribute that they’re designed to be paid back in full (plus fees) on your next payday following taking out the loan, meaning you have up to 30 days to pay it off. Payday loan companies can be found at walk-in locations in most cities or online and are usually easy to find.
This type of loan is considered open-ended because once it’s paid off, you can typically re-apply immediately to get more funds.
Installment loans are either long-term or short-term, closed-ended loans. They are easy to get, but some may require a credit check depending on the amount you desire. It takes as little as twenty-four hours to a couple of days to get money from an installment loan.
This type of loan is paid back in preset increments – or “installments” – which usually means paying a certain amount every month until the loan is paid off. This can take anywhere from a few months to a few years. Most loans work this way, and these loans are often offered by banks, credit unions, or installment loan agencies. Common examples include mortgages and car loans.
An installment loan is closed-ended because as soon as it’s been paid off, that’s the end of that loan. You can get another loan as soon as your last loan has been paid off if the need or want remains.
While payday loans and installment loans are both called “small-dollar, high-cost” loans, there are some key differences that can help you determine which is right for you.
- Payday loans can offer you $100 to $1500, but installment loans range from $150 to several thousand dollars.
- Payday loans have higher fees based on the amount you need, but installment loans often end up being more expensive due to their length and interest rates on top of fees.
- Payday loans are unsecured, so the lender assesses your ability to pay based on your income and payment history. Installment loans can be unsecured and base your ability to pay on your credit history, or they can be secured by personal items like cars, real estate, or jewelry which may be forfeited if the loan defaults.
- Both payday loans and installment loans are able to be renewed after your previous loan is paid in full.
So, which is right for you?
After learning about and understanding your options, there are a few questions you need to ask yourself to determine which type of loan is the best fit for you.
How much cash do you need?
- If you need a small amount for just a little bit of time, consider a payday loan.
- If you need more funds or funds for a longer period, go for an installment loan.
How will you manage payments?
- If you’re able to pay back your loan in full after a little bit of time has passed, a payday loan is your best bet.
- If you’ll need a longer amount of time and like the sound of predetermined payment arrangements, choose an installment loan.
How is your credit?
- If you have poor or no credit history, a payday loan won’t hurt you.
- If you have good or want good credit history, installment loans do impact your credit, and a good payment history boosts your credit score.
Ultimately, the kind of loan you need is based simply on what will work best for you. Both payday and installment loans offer immediate financial relief but require some effort on your end to be able to pay them off in a timely manner. Try to use loans only when necessary, otherwise you may fall into a cycle of requiring loans to meet your financial needs. As long as you do your research and know what to expect from your loan, your loaning experience should be pain and hassle free.