Are installment loans and payday loans the same thing? When people need money right away, they often fail to shop around and evaluate loan options. However, the repercussions of rushed loans can be serious. For this reason, we will analyze and discuss the differences and similarities between two common types of loans: payday loans and installment loans. So here’s what you need to know to make smart credit decisions and avoid doubling your debt.
What is an installment loan?
We’ve all undoubtedly used different types of installment loans, even if the term “installment” is unfamiliar to us. It is a kind of loan in which you borrow a certain amount of money and then repay it in monthly installments. Typically, these loans have a fixed repayment schedule, which means the monthly payment amount remains constant for the life of the loan. As a result, borrowers can simply organize their budget and loan repayment will not be a surprise as payment day approaches.
Common Examples of Installment Loans
Installment loans come in different forms:
They can be secured or unsecured, may have different repayment terms and APRs (Annual Percentage Rates). So whatever you’re looking for, it’s a good idea to compare interest rates https://shinyloans.com/articles/difference-between-nominal-and-real-interest-rate and repayment terms to find the one that suits you best. The most popular types of installment loans are:
These loans are granted to finance a new or used vehicle. These loans have a collateral when you secure the borrowed money against the acquired automobile. The repayment periods for these loans generally range from two to eight years.
These types of installment loans are usually unsecured and help pay for undergraduate, graduate, and other types of post-secondary education. The advantage of student loans is that you don’t start your payments right away. instead, you take the money, pay your tuition, and pay it back when you graduate and work.
Mortgages are provided to make major expenses, such as the house. The purchased property also secures these loans. Mortgage repayment terms typically range from 10 to 30 years.
What is a payday loan?
The question most often raised is that of the payday loan. These loans are becoming increasingly popular due to their wide availability. Advertisements for these small loans spread across the internet, attracting more borrowers. Payday loans are short-term loans lasting several weeks. These loans, also known as cash advances, are popular among low-income borrowers and those with a history of credit failure. Unfortunately, because they have high interest rates, it’s easy to get into debt.
Installment and payday loans: main distinctions
Let’s start by noting the distinctions between these loans. Therefore, the basic distinction between a payday loan and an installment loan lies in the repayment terms, payment mechanism, and loan amounts.
A personal loan is a very short-term loan with a maturity of usually less than one month, while an installment loan is at least two years old.
Payday advances must be repaid in one large payment. But installment loans, as the name suggests, are paid in monthly installments over a set period of time that can range from a few months to several years.
These two types of loans mainly vary in the amounts available. The amount borrowed for payday loans cannot exceed $2,500, while installment loans are available for higher amounts.
Installment loans generally have lower interest rates than payday advances.
Payday advances are easily accessible compared to installments.
The Similarity Between Installment Loans and Payday Loans
Despite the distinctions mentioned above, these two loan types also share some standard features:
The absence of a surety:
A basic similarity between payday loans and installment loans is that they are both often unsecured, meaning there is no property or collateral to back the transaction. In other words, if you fail to repay the borrowed money, the lender cannot seize your secured property.
Although installment loans are often granted by traditional credit institutions. (Banks and credit unions). They are increasingly available online through internet lenders. Accordingly, you can apply for these loans from anywhere and anytime.
No credit check:
Indirect credit drawdowns may occur in addition to hard credit drawdowns for online installment loans. Also, because internet lenders often do not set strict qualification standards for accepting these loans. Moreover, even consumers with poor credit could benefit.
When choosing between a payday loan and an installment loan, the latter is always the cheaper alternative. However, if you are denied an installment loan, you can always consider payday loan options.