Need extra cash for a medical emergency, sudden household expenses, or a dream vacation? Your first response, besides checking your savings account, might be to learn about the available different loan options. One possibility — and, it seems, a fairly popular one — is a payday loan.
But before deciding whether a payday loan is right for you, it's important to determine all the pros and cons — and just what type of financing you get with a payday loan.
So, Are Payday Loans Revolving or Installment Loans?
The answer is neither.
While payday loans are often confused with installment and revolving loans due to the fast and easy access to cash, the terms, length, and setup are different.
How Do Payday Loans Work?
Payday loans are low-amount, short-term loans. You must pay them back by your next payday (hence the name), meaning the repayment term is usually 2-4 weeks.
The upper limit of payday loans is generally $500, but in some states, the maximum amount can be as high as $1,000. Most payday lenders assess a fee or percentage based on what you borrow. For example, the lender could charge you $15 to $30 for every $100 you borrow. This means higher interest rates that can average around 400% APR.
The good thing about payday loans is that they don’t require credit checks, but the lenders still need income verification and your banking information. This accessibility can be helpful to tide you over between paychecks and provide cash for unexpected emergencies. But be sure to pay them back when due to avoid more fees.
Revolving vs. Installment Loans
Now that you know how payday loans work, let's take a closer look at installment and revolving loans.
What are Revolving Loans?
Revolving loans give you a set amount to spend. As you repay the loan, you can continue borrowing from the credit limit. You must make monthly payments on what you borrow, even if you don't use the full amount. When you reach the maximum total issued by the lender, you won't be able to borrow from the loan until you pay it down.
Common revolving loans include credit cards, personal lines of credit, and home equity lines of credit (HELOC). In most cases, institutions issuing revolving loans need your credit score.
One advantage is that revolving loans remain open indefinitely. You always have access to this cash or credit (assuming you pay it off). You don’t need to keep applying for a new loan. However, this loan type can carry higher variable interest rates than fixed interest rates, resulting in a higher payback amount. Additionally, revolving loans can come with annual fees and late charges if you pay your monthly installment after the due date.
What are Installment Loans?
Instead of having continual access to a certain amount of money, installment loans give you a lump sum of cash. You then repay the money in installments through a monthly payback plan. Unlike payday loans, these aren't paid back within a couple of weeks or a month. Depending on the loan term, those repayments occur over months or even years, giving you much more repayment flexibility — and access to much more funds. Once you repay the loan in full, the lender closes your account.
Installment loans come in two types: secured (requiring collateral) or unsecured. Either type is helpful for larger purchases, with terms lasting from months to years. Examples of this financing type include home mortgages, auto, student, and personal loans.
Unlike the variable-rate revolving credit, installment loans generally come with fixed interest rates. You know how much you owe each month, which helps your budgeting efforts.
Keep in mind that this loan type typically requires a credit check due to the higher loan amounts, but bad credit loans are available. For example, Jora Credit offers installment loans and considers much more than your credit score.
Alternatives to Payday Loans
Both installment and revolving loans are good alternatives to payday loans. They have lower interest rates and better terms than their payday counterparts. Since these lenders usually report to the credit bureaus (unlike payday lenders), you can also use revolving and installment loans to improve your credit:
- They help you build your on-time payment history, which accounts for 35% of your FICO credit score.
- They improve your credit mix/variety, which is highly influential.
Some installment loans — like those offered by Jora Credit — can provide cash within a few hours of application submittal. Payday loans also offer instant cash, but Jora Credit’s installment loans have more flexible repayment options. These loans also carry fewer extra fees.
Get Quick Cash Now
If you need some quick cash, consider an installment loan. Jora offers personal installment loan options that can provide a bad credit fix while offering payback flexibility. If you apply for a loan by 10:30 CT, you can receive your funds within several hours.
For more information on revolving vs. Installment loans, or to apply, visit Jora Credit.