Are installment loans and payday loans the same thing? When people need immediate cash, they frequently fail to shop around and evaluate lending possibilities. However, the repercussions of hastily obtained loans may be severe. For this reason, we will analyze and discuss the differences and similarities of two common lending types: payday and installment loans. So, here’s what you need to know in order to make smart credit decisions and avoid doubling your debt.
What Is an Installment Loan?
We’ve all undoubtedly utilized various sorts of installment loans, even though the phrase “installment” is unfamiliar to us. It is a sort of loan in which you borrow a particular amount of money and then repay it in monthly installments. Typically, these loans have a set payment schedule, which means that the amount of monthly installments remains constant during the loan’s lifetime. As a result, the borrowers may simply arrange their budget, and the loan payment will not come as a surprise when the payment day approaches.
Common Examples of Installment Loans
Installment loans come in a variety of forms:
They can be secured or unsecured, may have various repayment terms, and APRs (Annual Percentage Rates). So, whatever you are seeking, it’s a good idea to compare the interest rates and repayment terms to find one that suits you best. The most popular types of installment loans are:
These loans are provided to finance a new or used vehicle. These loans have collateralization as you secure the borrowed money against the acquired auto. Payback periods for these borrowings usually range from two to eight years.
These types of installment loans are usually unsecured and assist pay for undergraduate, graduate, and other types of post-secondary education. The great thing about student loans is that you don’t start your payments right away; on the contrary, you take the money, pay for your tuition and repay it when you graduate and are working.
Mortgages are provided for making big-dollar expenses, like home. The purchased property also secures these loans. The repayment terms for mortgages usually range from 10 to 30 years.
A loan that requires an asset as collateral is known as a title loan. Furthermore, Title loans are popular because they do not take into consideration an applicant’s credit rating and because they can be approved very quickly. The most common type of title loan is a car title loan, where the car itself is the asset put up as collateral.
What Is a Payday Loan?
The most often discussed issue is a payday loan. These loans are becoming increasingly popular due to their wide availability. The advertisements for these small loans spread over the Internet, attracting more borrowers. Payday loans are short-term loans for several weeks. These loans, also known as cash advances, are prevalent among low-income borrowers and those with a history of credit failures. Unfortunately, because they have high-interest rates, it is straightforward to go into debt.
Installment and Payday Loans: Primary Distinctions
Let’s begin by noting the distinctions between these loans. As a result, the fundamental distinction between a payday loan and an installment loan is in the repayment terms, payment mechanism, and loan amounts.
A payday loan is a very short-term loan that is generally due within a month, whereas an installment loan has at least two years.
Payday advances should be returned in one big payment. But installment loans, as the name implies, are paid in monthly installments over a defined length of time that might range from months to years.
These two loan types vary mostly in the amounts available. The borrowed amount for payday loans may not exceed $2500, while installment credits are available in higher amounts.
Installment loans usually have lower interest rates than payday advances.
Payday advances are easily accessible as compared to installment ones.
The Resemblance of Installment and Payday Loans
Despite the distinctions mentioned above, these two lending types also share some standard features:
The absence of collateral:
A fundamental similarity between payday and installment loans is that they are both frequently unsecured, which means there is no property or collateral to back the transaction. In other words, if you default on borrowed money, the lender can’t seize your collateralized property.
Although installment loans are often given by traditional lending institutions. (Banks and credit unions). They are increasingly available online through internet lenders. As a result, you may apply for these loans from anywhere and at any time.
No credit checks:
Soft credit pulls may occur in addition to hard credit pulls for online installment loans. Furthermore, because internet lenders frequently do not establish strict qualifying standards for accepting these loans. Moreover, even consumers with weak credit might take advantage of them.
When choosing between a payday loan and an installment loan, the latter is always the less expensive alternative. However, if you are denied an installment loan, you may still consider payday borrowing options.