If a person needs cash to cover an expense, they may wonder whether they’d be better off with a payday loan or an installment loan. The ideal loan depends on their unique situation. While payday loans are a good option in some cases, installment loans make more sense in others.
Below is a closer look at the difference between payday loans and installment loans so borrowers can choose the best financing solution for their budget and needs.
What is an installment loan?
An installment loan allows a person to borrow a set amount of money upfront. They repay it over time via fixed monthly payments or installments. In most cases, installment loans come with affordable interest rates and no prepayment terms. Since they’ll know exactly how much they’ll owe when they take one out, they’ll be able to budget for their payments with ease.
What is a payday loan?
A payday loan is a short-term, small-dollar loan one can pay off the next time they get paid. The repayment term for payday loans is usually within two to four weeks. It’s called a payday loan because it’s designed to hold them over until their next payday.
Installment loans vs. payday loans
While installment loans and payday loans can help a person pay for expenses, there are several differences between these two products, including:
How much you can borrow
Most installment loan lenders allow the borrower to receive between $1,000 and $50,000. Some even have higher maximum limits and offer up to $100,000 in funding. Payday loans, however, are typically small-amount loans that are a couple of hundred dollars and cap out at $500.
How long you can borrow it for
Borrowers usually have at least several years to pay back an installment loan. The loan terms will depend on the type of installment loan they take out, but they’re often between three and seven years. If they choose a payday loan, on the other hand, they’ll need to repay it in full within two to four weeks.
Compared to payday loans, installment loans have much lower interest rates. Someone may qualify for an interest rate in the single or double digits, depending on their credit. Payday loans offer sky-high interest rates that can make the cost of borrowing money very expensive.
Ability to build credit
As long as they make timely payments, installment loans can help borrowers build credit. Since payday lenders don’t usually report on-time payments to the credit bureaus, they can’t use them to improve their credit. However, payday loans and installment loans can hurt their credit, as most lenders report missed payments.
Banks, credit unions, and online lenders offer installment loans. Most lenders will allow potential borrowers to prequalify to check their rates without impacting their credit score. If a person would like a payday loan, they’ll need to find a payday lender specializing in payday loans.
With an installment loan, borrowers repay what they borrow plus interest and fees in monthly payments or installments. A payday loan will require them to pay back the loan in a few weeks when they get their next paycheck.
If a person is interested in an affordable loan with a more significant amount, an installment loan is likely the way to go. But a payday loan is worth considering if they need a couple hundred dollars to cover a small expense until they get paid next.
About OneMain Financial
OneMain Financial is the leader in offering nonprime customers responsible access to credit and is dedicated to improving the financial well-being of hardworking Americans.