Payday Loans vs. Installment Loans
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UPDATED: Dec 12, 2011
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In the world of short term lending, there is an ongoing feud between the payday lenders and the installment lenders. The internet is riddled with websites from both sides, most of which carry very strong opinions as to what kind of service, payday or installment, is best. But the debate between the two types of financing isn’t nearly as cut and dry as some of these lenders wish the public to think. Instead, there are times when payday loans are more beneficial, while there are other times installment loans are the wiser of the choices. A clear understanding of these borrowing types will help consumers determine what’s best for their unique situation.
Payday loans are a relatively new invention, coming into existence in the early 1990s. Originally, they began exclusively as small shops wherein borrowers could visit them personally to apply for quick cash. Today, while those physical shops still exist, many payday loan transactions are done online, from the comfort of one’s very own home.
This form of financing requires no credit check, so those with bad or no credit can apply for them without worry. However, applicants must have a bank account, a job, and a minimum monthly income established in the guidelines of each individual lender.
These are secured by borrowers’ paychecks. The borrower writes the lender a postdated check for however much they wish to borrow plus the fees associated with the loan. For example, on a $100 payday loan, the typical fee is $15. So the borrower would write a check for $115 that the lender can cash come the borrowers next payday.
While a 15 percent interest rate may seem high for a two-week loan, this type of financing allows borrowers with no credit or collateral access to quick cash. Payday loans can help borrowers avoid expensive credit card charges, late fees on bills, and a way to manage unexpected or emergency situations.
Installment loans, on the other hand, have been around much longer than the early 1990’s. These were initially offered only by small, independent lenders, but eventually were adopted by most major banks.
Installment loans typically grant borrowers much larger amounts than payday loans. For $1,000 to $10,000, borrowers can approach installment lenders for money to pay off auto bills, home mortgages, or medical charges.
This type of financing doesn’t require borrowers to pay their loan off in just two-weeks, but rather can often be taken out for up to a year or more.
However, installment loans usually require some sort of credit check, and aren’t available to those with very bad credit. Sometimes they require some form of collateral, usually in the form of an automobile or home.
Which is Right for Me?
The amount of cash borrowers need should be the first question asked when determining what type they should take out. If it’s a small amount needed for a quick charge, bill payment, or holiday expenditure, then a payday loan is likely the best bet. But if it’s a larger amount needed, then an installment loan may be the wisest choice.
If a borrower doesn’t have an adequate credit rating, then payday loans may be their only option.
Finally, borrowers ought to make sure they have a payment plan ready for either type. Payday loans can gain momentum and accrue a lot of interest if they’re rolled over (renewed) many times over. The services provided by payday loans are best utilized when a borrower can pay them off within a single term—two at the most. Installment loans come with fixed payments, and if a borrower defaults they can be turned over to debt-collection agencies. Sometimes defaulted installment loans can lead to wage garnishments. Also, failure to payback installment loans can negatively impact a borrower’s credit score. The flipside to this is installment loans can help improve a customer’s credit rating if paid back on time.