Occasionally your monthly paycheck doesn’t come together with your bill by reason of unexpected emergencies. This is a common happening that thousands of Americans face regularly. Of course, getting quick funding is not a big deal; however, making a proper decision when you face many options is kind of confusing.
Today we will talk over two kinds of emergency loans notoriously known as payday and installment loans. They are similar as they both can help you when you need some extra cash quickly. They both are well-known for being handy to avail, and they are pretty simple to qualify for. Now we have a question of whether these types of loans are similar or how they are different.
A Payday Loan Explained
A payday loan is a short-term, unsecured loan lent until the borrower's next paycheck. These loans are usually offered by lenders operating either in-store or online. Usually, they are useful to get quick financial relief and surface financial gap between your paychecks. However, before taking out one, you need to consider that they are different from other credit tools. For example, you cannot pay off your payday debt over time, as you are required to pay it back all at once until your next paycheck. Usually, payday lenders require easy-to-comply requirements, such as being at least 18 years old, having a sufficient income source, and an active bank account.
When and Why People Use Payday Loans?
Usually, people apply for payday advances to cover small expenses or handle unplanned emergencies. In spite of a powerful economy, many Americans still have difficulties with saving money. A survey conducted in 2019 showed that about 70% of Americans have not more than $1,000 in their savings. This is the main reason why so many people count on payday advances, as quick availability and the absence of credit checks always beats class.
What is an Installment Loan?
The term installment loan generally refers to all kinds of loans that are paid back in equal monthly repayments. Unlike revolving credit tools, such as credit cards, each payment on installment debt comprises not only the interest but also a part of the principal amount. One of the common examples of installment loans are mortgages, auto loans, personal loans, etc.
Borrowers can take out installment loans while shopping around for a bank or a credit union, also they can apply to online lenders and get extra cash distantly.
From loan terms to how the debt is paid off, payday and installment loans don't have much in common than you may think. Here are the major differences that these two credit tools do have:
Originally payday loans are designed to be paid back within a small period of time, normally offered between 7 and 60 days. Meanwhile, the repayment term for an installment loan may vary from two to five years. The second important point that distinguishes these loans is the repayment method. Payday loans usually require one-time payments, which means that debt must be paid off all at once by making a lump sum payment. Opposed to this, installment loans suggest a balanced repayment schedule, where you pay your debt back a little bit at the time over many months.
The amount of cash available to take out in the case of payday loans usually varies between $100 and $2,500, but you need to consider that these loans look different in almost every state. Thus, check the regulation of your own state before starting your credit application. Meantime, the available amount for installment loans ranges between $1,000 and $100,000, depending on your eligibility.
What About Eligibility?
Payday lenders don't usually check credit scores, which is why there is an option for those with poor or no credit, but at the same time, payday loans can have interest rates of up to 400% or more. Conversely, in the case of installment loans, credit rating plays a bigger role than you can imagine. To put it simply, the higher your credit rating, the higher your chances of getting larger amounts with reasonable rates.
The Bottom Line
There are no things like bad or good credit tools; there is a thing called inappropriate decision-making. In fact, the chaos on these two types of loans is artificial, as everything is much easier than you think.
Look, the guide is as follows: if you are looking for several hundred dollars to return in a short period, payday loans may be a good option worth examining. However, if you need a couple of thousand dollars, it will be better to start looking towards installment loans. So make sure which type of loan you need, look at your situation, and find out which one is going to be best for you.