Payday and Installment loans are popular borrowing options that can be availed by people who need short-term emergency funds. While both loans offer fast access to funds, they have distinct differences. This article will examine these differences to help you choose the loan that best suits your needs.
Structure of the repayment
As the name suggests, payday loans are due on your next salary date. Thus, their repayment time is typically within the next two to four weeks. You must pay the principal and interest amount together on the given date.
Instalment loans would let you pay in fixed instalments over a pre-decided period. The loan’s entire term can vary from a few months to years, depending on the loan agreement you signed.
The total loan amount
Pay day loan is generally short-term small loans that help with emergency financial needs before your next paycheck arrives.
Instalment loans are for people who need higher amounts. However, the money you get will depend on factors like income, expenditure, creditworthiness, etc.
Lenders of payday loans do not conduct a detailed credit check or analyse the borrower’s credit history. However, they would need your income proof and bank details. Thus, it is a good option for those with poor creditworthiness; you can make timely repayments and improve your credit history. Before getting instalment loans, your credit history will be thoroughly checked and analysed. They will also basically see your salary and work history. The better your credit score is, the better advance terms or intrigued rates you’re likely to get.
Total fees and the rate of interest
Pay day loan generally has higher interest rates and fees; thus, they are quite expensive. If you can calculate, the APR for this type of loan can sometimes exceed 400%. Instalment loans have a high APR, but it is lower than payday. However, these loans have some additional fees but are more transparent. Instalment loans are more regulated and designed for the convenience of the customers.
Remember that as payday loans are short-term and come with a higher interest rate, it is often associated with a debt cycle. If you have a fixed income and most of it goes to your regular expenses, repaying the entire loan on your next salary date becomes challenging. Hence, you must thoroughly understand and analyse your financial situation before taking up this loan. If you have a good credit score, opt for instalment loans with a fixed structure and offer greater flexibility regarding repayment.