Installment vs. Payday Loans: Which is better?

Installment vs. Payday Loans: Which is better?

Installment and payday loans sometimes get confused for each other, so the goal of this article is to clarify the difference between these types of loans. When applying for a loan, which of the two is better to get? Here’s what you need to know about installment and payday loans that will help you make this important financial decision.

What are they?

As the name suggests, an installment loan is a type of loan wherein the borrower is required to pay in installments. In each regularly scheduled payment, the amount of the loan, the interest rate, and the length of the loan are considered. Some examples of installment loans include automobile, mortgage, and personal loans.

Meanwhile, a payday loan is a short-term credit charged with a high interest rate that borrowers apply for if they need immediate cash. Payday loans are also called cash advance or check advance loans.

How do they work?

When you apply for an installment loan, you borrow money once and then pay regularly, at least until the term of the loan is over (or, in the case of late payers, until you’ve paid the principal amount plus interests). Most installment loans have fixed interest rates, which means that the interest rate charged to the borrower is the same from beginning to end of the loan’s term. However, the interest rate among borrowers is usually different, depending on the person’s credit score and history. Meanwhile, the principal amount of the loan usually depends on what you’re using it for, e.g. the principal amount of a car loan is much lesser than the principal amount of a mortgage loan.

As mentioned earlier, people usually apply for payday loans when they need immediate cash. The principal amount of a payday loan depends on the borrower’s monthly paycheck. When it comes to the interest rate, it typically varies per state. There are states that limit interest charges on payday loans. For example, payday loans in Ohio have an interest rate cap of 28%.

Which is better?

Installment and payday loans serve very different purposes. If you have long-term financial goals like buying a house or a car, then an installment loan is better for you. It will give you a higher principal amount, a longer payment period, and a lower interest rate that will help you achieve these big financial goals. On the other hand, if you need cash right away, a payday loan is better for you. It has smaller principal amounts and higher interest rates, but you can pay off urgent needs with the cash you’ll get from it.

The bottom line is, it really depends on your situation whether you should get an installment or payday loan. Remember to consider all of your options, to asses your current financial status, and to find a reliable loan provider so that you can make the best financial decision for yourself. You also need to make sure that there are no hidden fees to avoid unexpected charges. And lastly, remember to pay your loan payments on time to maintain a good credit score.