Payday Loans vs. Installment Loans: 5 Key Differences Between Them
Payday loans and installment loans are convenient ways to pay for expenses. Both are personal loans that can finance home repairs, medical bills, shopping sprees, or vacations. However, there are vast differences between the two payment options. Comparing the two can help you choose the best method to finance your expenditure.
Differences by Definition
What is a Payday Loan?
A payday loan is a cash advance given by a money lender. Borrowers can maneuver between checks with this quick cash plan and the repayment period is usually two to four weeks. The loan fee is a percentage of the borrowed amount payable in one lump sum on the borrower’s next pay date-hence the term payday.
Payday loans are an excellent option for people with a low credit score, limiting their access to loans. However, conditions for acquiring this credit vary between financiers.
What is an Installment Loan?
For installment loans, borrowers receive an initial lump sum of money from lenders and repay the loan with interest in small monthly installments. The loan payment period is usually long-term, lasting between 3 and 5 years. Furthermore, this loan has fixed interest rates and hardly any additional hidden charges. It is an excellent option for borrowers requiring an extended payment period.
Loan Annual Percentage Rate (APR) Differences
An APR for personal loans is the interest rate charged to the borrowed amount expressed as a percentage per year. Installment loans usually have lower APR than payday loans. A loan with a low APR costs less to borrow.
The rates are lower for installment loans because creditors do not include additional charges or fees. Thus, the APR is usually the same as the interest rate for this type of loan. Additionally, the loan becomes much more affordable because of these low rates.
On the other hand, payday loans have high APRs despite the borrowing period being short-term. The APR is a product of compounding the credit amount, resulting in a three-digit APR. The average payday loan APR is 398%.
The high APR indicates just how expensive this credit can get. It is comparable to a financial quicksand because many borrowers hardly have the entire amount by the designated payday. Without proper planning, the payday loans can become a vicious borrowing cycle.
A high credit score increases a person’s chances of getting a loan. Installment loan creditors always check credit scores before issuing a loan. The downside to this loan-determining factor is that a good credit score can easily be marred with one delayed payment-even when the track record is perfect.
One late payment can make someone drop 180 points on their FICO score. The FICO score evaluates credit risk based on your credit history. A low score indicates a high likelihood of default. Thus, the drop negatively affects a person’s eligibility for the installment loan.
In contrast, creditworthiness for payday loans is not that straightforward. Most lenders disregard the credit score. Some Check the perimeters without deep scrutiny. Therefore, borrowers can get a loan despite their financial history.
The leeway regarding credit scores makes payday loans the perfect option for monetary emergencies. Some financiers avail funds after a short application process online. Others have to assess the applicant’s financial history first. Regardless of the process, credit score evaluation in payday loans is laxer than in installment loans.
Borrowers can use such characteristics to determine the best lending entity for their urgent cash needs. However, it is worth noting that such advantages come at a high financial cost in terms of loan affordability.
Differences in Loan Amount
Payday loans are usually smaller, a couple of hundred dollars that hardly exceeds $1,000. The borrower usually writes a postdated check or permits the owner access to deduct the loan automatically from the next paycheck. If the borrower fails to pay the amount and interest, the lender rolls over the loan to the next paycheck with higher interest.
Although the amount loaned is small, the loan cost and default conditions make using payday loans expensive. It comes at a much higher cost. Therefore, payday loans are only efficient for emergencies where the need for cash is urgent. Payday loans are also perfect for borrowers who can pay the loan on the specified day to avoid further costs.
On the other hand, installment loans cover all sorts of loans because cash borrowed often exceeds thousands of dollars. Therefore, they are the best solution for long-term cash needs. Additionally, the extended payment period and evenly distributed installments make the process less cumbersome. The installments are also affordable compared to the one-time payment cost in payday loans.
You can purchase a car on credit and pay the installments over three years. Alternatively, you can obtain a mortgage and pay it over a 30-year timeframe. The installments are also affordable and feasible, reducing the risk of default payments.
Differences in Eligibility Criterion
The eligibility process for installment loans is usually long and critical. The credit score has a heavyweight on eligibility. Although some lenders may still give someone an installment loan despite the pitfalls in their monetary issues, most require high credit scores and impeccable financial history. Once a person gets the creditor’s approval, the interest rates remain the same.
On the other hand, anybody can qualify for payday loans. This is because creditors never scrutinize the credit score of applicants. However, they may require evidence of a paycheck since that is where they will acquire their funds. Therefore, a low credit score may not affect eligibility for a loan-it may not even be significant to getting the loan.
Access Financial Credit With Slick Cash Loan
At Slick Cash Loan, we provide affordable rates for our payday and installment loans. We know the importance of personal loans in solving emergencies. So choose the suitable loan for your financial requirements to get the help you need today.