Installment Loans vs Payday Loans: What’s the Difference?
Unexpected expenses often catch people unprepared. Installment and payday loans can help fill in the financial gaps when car repairs, medical bills, and other costs need to be covered right away. Urgent needs require quick help, which is where installment or payday loans come in. These loans can provide the required cash without a lengthy application and funding process.
Both types of loans can provide access to needed cash, but each has advantages and disadvantages you should carefully review before deciding. The cost and application process for installment and payday loans can vary from lender to lender. Still, the two types of financing have common characteristics to consider when determining whether to go with a payday loan vs. an installment loan. If you experience a financial gap, Koster’s Cash Loans has installment loans to get you the cash you need.
What Is an Installment Loan?
Installment loans are funded with a lump sum to the borrower and are paid back over a set period. Mortgages, car loans, and personal loans are all installment loans that are paid back over months or years. They’re sometimes secured by collateral like property or vehicles, but many are unsecured. Mortgages can have terms measured by decades, whereas personal loans have terms from a few months to a few years. Installment loans can be for a few hundred dollars up to hundreds of thousands of dollars.
Installment loans require a credit check and an application process that includes verifying employment, income, address, and other vital information. Interest rates are lower on installment loans when compared to payday loans. Available credit and terms like interest and origination fees vary based on the borrower’s credit score, income, and other factors like debt levels.
Installment loans close once the principal is paid in full. Borrowers seeking more funds need to re-apply, which is often easier at a lender where you have a proven track record of on-time payments. Installment loans may be secured by collateral for lower interest rates, but this puts your vehicle or other assets at risk should you default on the loan.
Interest rates for installment loans vary greatly depending on the borrower’s circumstances and the size and length of the loan. The annual percentage rate (APR) can range from single digits to triple digits. Terms can improve for those who take future loans from a lender after establishing a good repayment history. Rates and terms are generally fixed, with the ability to pay extra or prepay the loan before the end of the term. Some lenders allow multiple loans simultaneously for those who have the qualifications.
What Is a Payday Loan?
Payday loans are usually under $1,000 and are intended to cover expenses until your next payday. The loan principal, interest, and fees are typically paid from the borrower’s checking account or prepaid card account after two weeks or a month. Lenders are often willing to roll payday loans over if you can’t pay them back in full, but additional fees and interest apply. Rolling over payday loans can cause financial hardship as the interest and fees pile up, so these loans work best for those who can pay them off with their next paycheck.
Payday loans don’t require a credit check — just proof of current income, employment, and address, making them more accessible to those with a poor or nonexistent credit history. Interest rates are quite high, often over 300% APR, which isn’t substantial for a two-week loan as long as you can pay it off versus roll it forward to the next pay period. The amount available varies based on the applicant’s income level but is typically under $1,000.
Like most forms of credit, payday loans are available only to those 18 or older who have an income source and a checking account. The loans aren’t considered installment loans since they are designed to be paid off in one payment. They also aren’t considered revolving loans, like credit cards, that stay open as borrowers use the credit and pay it back in full or partial payments.
How Do I Qualify for an Installment or Payday Loan?
Regardless of the type of loan, there are a few basics that are needed to complete an application:
- Proof of residence through a recent utility bill or apartment lease.
- Paystub or pay statement to prove income.
- State-issued identification like a driver’s license.
- Banking or prepaid card information.
- If required, Social Security number for accessing credit report.
- Collateral, if needed, like a car title.
- Applicants for any type of credit should carefully review the terms, including payment amount, interest and other charges, and any potential penalties for late payments or returned checks. If no collateral is required for the loan, your signature is the guarantee that it will be paid back.
Why You Should Apply for an Installment Loan Over a Payday Loan
Installment loans provide the best terms and the least risk of having unmanageable bills. There are four main things to consider when weighing your options for covering unexpected expenses:
How much do you need to cover your expenses? Payday loans are usually for a few hundred dollars, while installment loans can be for hundreds or thousands of dollars.
Payday loans are typically payable in full within two weeks to a month after you get the cash. Installment loans are payable with fixed payments over months or years.
The APR for payday loans is often around 300%, while installment loans have interest rates that range from single digits to over 100%.
Credit is a major determining factor in loan availability and terms. Those with limited or poor credit histories may not be approved for installment loans, or they may not be able to access the amount of cash or the interest rates they seek. Payday loans typically only require income, proof of residence, and an account for paying the loan off.
Which Type of Financing Works Best for You?
Consider how fast you’re able to pay the loan back in full. Even though interest rates are higher, payday loans can be an option if you can cover them with your next paycheck. Installment loans are an option for those who need extra time to pay them off and have the ability to qualify for terms that work for them.
If you need cash now, check out the installment loan options at Koster’s Cash Loans. Give us a call at 702-735-7111 to speak to a team member who can answer any questions you may have or get started on the application process online today.