Installment Loans Vs. Payday Loans

What do you do when your savings account is drained, and you’re faced with an unanticipated expensive car repair? You can’t get to work without the car, so paying that bill becomes your priority.

It’s not uncommon for Americans to find themselves short on funds these days. Fortunately, there are a couple of options to help you make ends meet.

Read on to find out the difference between installment loans and payday loans and which one may be right for you.

What Is an Installment Loan?

Installment loans are loans acquired for a specific purpose at a specific dollar amount with a specific interest rate for a specific amount of time. They’re usually issued through a bank but can also be acquired through finance companies.

Installment loans are set up to be paid back through a fixed number of payments, called installments. The number of months is based on the size of the loan. For instance, a bathroom remodel may be set up for 12-24 months, and a car loan maybe 60 or more months. A mortgage is a larger installment loan with most monthly payment plans being set up for 15-30 years.

To qualify for an installment loan, you’ll need to be at least 18 years old (19 in Alabama) with certain income requirements based on the type and amount of the loan you’re requesting. Collateral, a physical asset worth at least as much as the loan amount, is often required for the lending agency to secure the loan – especially with car and home loans.

Minimum credit scores are a common requirement and can affect your interest rate, and it can be difficult to acquire installment loans with bad credit. A better credit score usually means a lower interest rate. Your payments, whether on time or late, will be reported to credit bureaus so an installment loan can be a good way to build your credit and improve your credit score.

What Is a Payday Loan?

A payday loan, also known as a cash advance loan, is usually acquired through a lending agency and is meant to be very short-term but often carries a high interest rate. In fact, most are designed to be paid in full at the time of your next payday, hence the name.

To qualify for a payday loan, you’ll likely need to be able to provide the following:

Proof of age
Bank account information
Proof of employment
Your social security number

The application process can be completed in as little as five minutes, and you usually get an immediate response. You can often receive your funds in less than 24 hours.

Many payday loan companies don’t check your credit to qualify you for a loan. The total amount borrowed can’t exceed a certain percentage of your regular paycheck. The entire loan plus interest and fees are expected to be paid at the time of your next regular paycheck. If you choose to roll your loan over, you will likely be required to pay the interest that has accrued since you obtained the loan and then will be able to defer your principal payment to the date of your next paycheck.