When seeking a loan, it’s important to find a loan that works best for your particular borrowing and repayment needs. When you are choosing between a payday loan and an installment loan, it’s important to know how each works so you can decide which route is best for you.
A payday loan is a loan typically structured where you agree to pay back the entire amount of the loan, including interest, by the date of your next paycheck. As an unsecured loan, there is no collateral involved. Unlike some traditional lenders who may be wary of extending a loan to someone with previous credit issues, payday loans are typically granted to people with lower credit scores.
While payday loans are typically due in full by your next paycheck, installment loans work differently. The repayment of the loan occurs over a predetermined amount of time, and the loan is paid back in a series of regularly scheduled payments, or installments, until the loan is paid back in full. These regularly scheduled payments consist of the total amount borrowed (principal) plus the interest that is accrued on the principal.
Payday loans tend to have higher interest rates than installment loans. These higher interest rates typically make payday loans a more expensive option than installment loans.
Installment loans typically allow for larger lending amounts than payday loans. Since a payday loan is essentially a cash advance of your next paycheck, the cash amount you can borrow from a payday lender is usually limited by the size of your next paycheck.
Installment loans offer longer terms than payday loans. Instead of by your next paycheck, installment loans are designed to be repaid over a longer period of time—usually across months or years.
Payday loans are often repaid through cash or a post-dated check. Many installment loans can be repaid in a variety of ways: direct transfer to the lender, cash or check.
When evaluating whether a payday or installment loan is best for you, here are some factors to look at:
How much do you need to borrow? If you need a larger amount, a payday loan may not be able to accommodate your request. An installment loan is more likely to accommodate a larger loan request.
How quickly do you plan to repay? If you need a longer time than a single paycheck period or need to have a more manageable repayment schedule, installment loans may be more advantageous.
Do you need to improve your credit score? Use of payday loans may not have any impact on your credit score. However, the responsible repayment of an installment loan may show credit agencies you are a worthy credit risk and improve your credit score.