Payday Loans vs. Installment Loans : Understanding the Differences

When you need money fast, payday loans and installment loans are two common lending options. Both offer quick access to cash, but there are several key differences between these high-interest loans that borrowers should understand. This in-depth blog post examines payday and installment loans side-by-side, comparing factors like loan amounts, fees, repayment terms, credit checks, and more. Read on for a complete overview of the pros, cons, and differences to make an informed borrowing decision.

What are Payday Loans?

Payday loans provide an immediate lump sum of cash that is repaid when you receive your next paycheck, usually within 4 weeks. These loans don’t require a credit check and are based on your income.

To qualify for a payday loan, you simply need to have:

  • A regular paycheck from employment
  • An active checking account
  • Identification
  • Minimum income requirements that vary by lender

Payday lenders will confirm you meet the requirements but will not do an intensive verification of your income or credit score. This makes qualifying for these loans easy and fast.

Once approved, the lender will directly deposit the loan amount into your bank account as soon as the same day you apply. The loan principal, along with interest and fees, are then due to be automatically withdrawn from your account on your next pay date.

Payday Loan Terms:

  • Loan amounts – $100 to $1,000
  • Repayment term – 14 days to 1 month, aligned with your pay cycle
  • Interest rate – Often $15 to $30 per every $100 borrowed; translates to APRs of 300% or higher
  • Fees – Origination fee of up to $30 per $100 loaned along with insufficient fund fees if repayment fails

What are Installment Loans?

Installment loans provide larger loan amounts that are repaid over fixed periods in regular installments. These loans do consider your income and credit history when determining approval and loan terms.

Installment loan lenders will assess factors like:

  • Credit score and credit history
  • Debt-to-income ratio
  • Employment and income verification
  • Existing debts and expenses

Based on this information, the lender will decide whether to approve your loan and determine appropriate loan terms including amount, interest rate, fees, and repayment schedule.

The agreed loan amount is then dispersed upfront as a lump sum. You’ll repay the loan in fixed installments over the loan term until it is fully paid off. These installment payment amounts and due dates do not fluctuate.

Installment Loan Terms:

  • Loan amounts – $1,000 to $50,000
  • Repayment terms – Vary from several months to 5+ years
  • Interest rates – Typically 6% to 36% APR
  • Fees – Origination fees from 1% to 10% of the loan amount

Comparing the Differences

When considering a payday loan versus an installment loan, weigh these key differences:

  • Loan amounts – installment loans provide higher amounts
  • Repayment terms – payday loans have very short terms while installment loans range from months to years
  • Interest rates – payday loans have astronomical rates around 300% APR versus 6% to 36% for installment loans
  • Fees – payday loans have fees per $100 borrowed that really add up
  • Credit checks – payday lenders typically don’t check your credit but installment lenders do

Overall, installment loans give you access to more reasonable loan amounts at much lower interest rates and over more manageable long-term repayment schedules. But payday loans have their place when you need a very small amount of fast cash before your next paycheck.

Carefully consider both options including rates, terms, fees, credit checks and your financial situation to make the best choice.