Are installment loans and payday loans the same thing? When people need cash right away, they often fail to shop around and explore credit options. However, the impact of hasty borrowing can be severe. For this reason, we analyze and discuss the differences and similarities between two common types of credit: payday and installment credit. So here’s what you need to know to make smart credit decisions and avoid doubling your debt.
What is an installment loan?
We have all undoubtedly taken advantage of different types of installment loans, even if the phrase “rate” is unknown to us. It is a type of loan where you borrow a certain amount of money and then pay it back in monthly installments. Typically, these loans have a fixed payment schedule, which means that the monthly installments remain constant throughout the life of the loan. This allows borrowers to organize their budget easily and the loan disbursement does not come as a surprise when the disbursement day approaches.
Common examples of installment loans
Installment loans come in different forms:
They may be secured or unsecured, may have different repayment terms and annual percentage rates. 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 one that suits you best. The most popular types of installment loans are:
These loans are used to finance a new or used vehicle. These loans are secured because you are securing the borrowed money against the car you have purchased. The amortization periods for these loans are usually between two and eight years.
These types of installment loans are typically unsecured and support payment for elementary, college, and other types of post-secondary education. The great thing about student loans is that you don’t start making payments right away; on the contrary, you take the money, pay your tuition, and pay it back when you graduate and work.
Mortgages are made available to make large expenditures like buying a home. The acquired property also secures these loans. Mortgage repayment periods are generally between 10 and 30 years.
What is a Payday Loan?
The most discussed topic is a payday loan. These loans are becoming increasingly popular due to their wide availability. The ads for these small loans spread across the internet, attracting more borrowers. Payday loans are short-term loans over several weeks. These loans, also known as cash advances, are common among low-income borrowers and those with a history of credit defaults. Unfortunately, since they have high interest rates, it is easy to get into debt.
Installment and Payday Loans: Primary Distinctions
Let’s start by noting the differences between these loans. Therefore, the basic difference between a payday loan and an installment loan lies in the repayment terms, the payment mechanism and the loan amount.
A payday loan is a very short-term loan that typically matures within a month, while an installment loan has a minimum of two years.
Forms of payment:
Payday advances should be returned in one large payment. But installment loans, as the name suggests, are paid out in monthly installments over a defined period of time, which can range from months to years.
These two types of loans mainly differ in the amounts available. The borrowed amount for payday loans must not exceed 2500 euros, installment loans are available in higher amounts.
Installment loans usually have lower interest rates than payday loans.
Payday advances are easily accessible compared to installment payments.
The Similarity of Installment and Payday Loans
Despite the above differences, these two types of loans also share some standard features:
The lack of collateral:
A basic similarity between payday and installment loans is that both are often unsecured, meaning there is no ownership or collateral for the transaction. In other words, if you default on borrowed money, the lender cannot seize your secured property.
Installment loans are often granted by classic credit institutions. (banks and credit unions). They are increasingly available online through Internet rental companies. Therefore, you can apply for these loans anytime and anywhere.
No credit check:
With online installment loans, soft credit pulls can also occur in addition to hard credit pulls. In addition, because Internet lenders often do not set strict qualification standards for accepting these loans. In addition, even consumers with poor credit ratings 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 still consider the options of a payday loan.