What Is The Difference Between A Personal Installment Loan And A Payday Loan?
To understand the difference between a payday loan and installment loans, we must look at a range of issues that include the amount involved, interest, fees charged and repayment.
15/02/2022
Payday and installment loans are lifesavers, especially if you need quick cash to sort out emerging financial needs. These are short-term loans involving a small amount of money not exceeding $1000. The payment of such loans is always due on the next paycheck. On the other hand, installment loans are lump-sum amounts paid in small amounts over a stated period. It may be paid monthly or biweekly. The payment covers the principal amount and the interest. Such loans could be unsecured or secured depending on the lender and the amount involved.
Whereas payday loans are small advances that should be paid on the next payday, Installment loans are lump sum loan advances to the borrower. They should be paid in fixed installments over a stated period. Payday loans are essentially life savers and should be processed within 24 hours.
To understand the difference between a payday loan and installment loans, we must look at a range of issues that include the amount involved, interest, fees charged and repayment. There are other factors such as the use to which you will put the money to and many more. This post explains the difference between personal installment and payday loans based on the amount involved, the interest charged, loan usage, and impact on credit score.
Amount Involved
Payday loans are emergency loans intended to help the recipient sort out an emergency. It involves small amounts of money not exceeding $1000, which should be paid on the borrowers' next payday. The loans are meant to bridge the gap between footing the unnecessary expense and the paycheck. The repayment includes the principal amount and the interest. In some cases, the borrower writes a postdated check in exchange for cash. On the contrary, installment loans are lump-sum loans of more than $50,000 which should be paid in installment over a fixed period.
Interest Charged
Payday loans are risky loans advanced to borrowers with a bad credit score. So they charge a higher fee ranging from 10% to 30 % depending on the lender and the state. Also, each state may prescribe the minimum number of days that should lapse before payment is due. On the other hand, installment loans are low-interest loans that the borrower can pay over a stated period. The interest charged is determined by the borrower's credit score. Anyone with a good credit score can pay as little as 6 %, while those with a poor credit score may pay as high as 36% because of the risks involved.
Loan Usage
Whereas the payday loan is intended to help the borrower sort out the emergency, the lenders do not care about how the advanced money is used. They only worry about the borrowers' capacity to repay the loan.
In comparison, an installment loan is either a secured or unsecured loan that the borrower takes against the property. One should provide collateral for secured loans before you qualify for the loan. It involves a large amount of money which you can use to purchase assets such as a car. You may also use it to buy a house and pay the loan in installments. The unsecured loans are likely to attract more interest compared to the secured loans. Thus, an installment loan is a flexible loan that you can put to any use. There are cases where the terms of the amount involved are tailored to the borrower's specific needs, including the ability to pay.
Impact On The Credit Score
Payday loans are meant for people who cannot access financing from other institutions because of poor credit ratings. You can secure the loan with no credit check and so, such loans are never reported to credit bureaus. Thus, the borrower cannot use them to build the rating.
On the other hand, you may use installment loans to build your credit rating. Most lenders will report the credit history to the three credit bureaus, so they will build their credit score if the borrower repays the loan on time.
Overall, taking an installment loan is better compared to payday loans. But it may not be the best loan if you rely on the primary source of income to service it. Therefore, once you take the loan, the next thing you'll need to do is create more avenues of income to help you repay the loan comfortably. It eliminates the possibility of running into trouble with lenders in the future.