There are a few similarities between payday loans and installment loans. For example, they are both small dollar loans where the lending business will give you a cash advance for just a few hundred dollars, unlike the banks and other conventional lending institutions, which generally are not keen on such a small amount. Secondly, both these types of loans and processed and approved quickly, and is thus of great help to those who need the money urgently because they are in an emergency.
However, make no mistake about this. There are lots of differences between payday loans and installment loans. They may seem to be the same because of a few similarities, and that is why many people often get confused. But the two are not the same.
Let us try to find out what makes the two different.
What Is a Payday Loan?
A payday loan is a short-term cash advance that is issued till the next payday. It is usually for a couple of weeks. The money advanced is between $200 and $1000 in most cases. The application process is easy. Processing and approval is quick. The money is credited directly into your bank account. On payday, the full amount plus interest and fees is debited from your account. Most of the payday lending businesses is located around the big cities. In recent years, many of these businesses are working online.
What Is an Installment Loan?
You can take an installment loan for the short-term, much like a payday loan, or for a slightly longer time. That is a big difference between the two. These loans too, usually are between $200 and $1000, but sometimes, the lending company will agree to provide a loan for a larger amount of money. In fact, this can even go up to thousands of dollars if the lender agrees. The repayment terms are also different. As is evident by the name itself, you have to repay the loan over a period of time in a series of installments.
Mortgages and car loans are also installment loans, but in recent years. There is often collateral with installment loans to secure them, such as personal property like consumer electronics, your automobile, jewelry, power tools or firearms. However, wedding rings and real estate is not accepted as the collateral. However, lately, they have included unsecured loans too, much like payday lending. Unsecured loans mean cash advances without a collateral. In payday lending, there is never any collateral involved.
The Application and Approval Process
You can apply to both these types of loans over the internet. You can apply a payday loan with us here. Most of the lending businesses have their physical offices too where you can walk in and make the application. The application process is easy. You have to provide some basic information like your name, address, contact number, email address, and social security number. For both payday and installment loans, you have to prove that you have a stable source of income as the loans are offered without collateral.
Processing begins as soon as you have completed the application process. If you have provided accurate information and all documentation if asked for, then the approval process is quick too for both these types of loans. It will take between 2-3 business days for the money to arrive in your bank account. It is a direct credit transfer.
The approval requirements are however tougher for installment loans. Many lending agencies will use a monthly net income/expense budget formula to make sure that you will actually be able to repay the amount. That’s because, these businesses are taking a higher risk, as installment loans are for a longer period of time.
With payday loans, on the other hand, the lending business has a lower risk. The cash advance is just for a couple of weeks, and the money is deducted directly from your bank account after the next payday.
How Much Do You Have To Repay?
For both, you will need to repay the initial amount you borrowed, plus the fee and the interest that is due. So which one is going to cost you more money? Initially, it may seem to you that a payday loan is costlier because the entire amount plus the extras are to be repaid at one time, together. But that is not the full picture.
When you total the amount eventually repaid to the installment loan lending business, you will notice that this will end up costing you more because you have to repay for a longer period of time.
Plus, an installment loan is going to keep you in debt for a much longer time. With a payday loan you are over and done with after just a couple of weeks once you have repaid after your next payday. An installment loan, on the other hand, can keep you in debt for a long time, sometimes for several years, depending on your loan terms, and the amount you had borrowed initially.
Both installment loans and payday loans are legal in the United States and many countries in the world. Installment loans are licensed and regulated by both Federal and State consumer protection agencies. Payday lending is legal too in most US states, but in recent years, many restrictions have been placed on them on the accusation that the lending businesses are charging a high interest rate. The actual restrictions imposed vary from one state to another. So you should check the laws in your state before agreeing to take a payday loan.
Here is Legal Status of Payday Loans by State in The United States of America.
Many critics have slammed payday lending for the supposedly high interest rates. In recent times, however, many, including some lawmakers and even experts have come out in favor of payday lending because these loans are the only hope for a large section of the people who need cash in an emergency.
Payday loans are short-term loans for just a couple of weeks. So how much more would you end up giving away as the repayment? An installment loan keeps you in debt for a longer period of time, which may not be the best plan for people who are not doing well financially, as many of them have an uncertain life anyway.
Interestingly, though a lot of critics are still against payday lending, but these loans continue to remain popular throughout the country. Millions across the United States and elsewhere in the world continue to take payday loans.
There is a difference between payday loans and installment loans here as well. Typically, when you take a payday loan, you have to issue a post-dated check, which the lending business is going to cash after the next payday. There is no requirement for a direct debit from the bank account you had provided as you have to make the payment to the lending business just once. On the other hand, the money due in an installment loan is directly paid or withdrawn with a check every month from the bank account you had provided while taking the cash advance.
Rolling Over the Loan
Both these loans have a fixed term. In the case of payday lending, it is till the next payday, as the name suggests. On this date, the amount due will include the amount you borrowed, and also the fees and interest. However, if for some reason you are unable to repay the total money due, then many lenders will agree to roll it over for the next couple of weeks or a month. But new fees are going to be added, which is the same that happens with banks and other conventional lenders when you cannot repay on time.
In the case of an installment loan, there is also a fixed term, and till that time you have to make installment payments every month. It’s just longer than a payday loan as the term can even be for a year or more. You can renew an installment loan every few months. When you do this, additional interest and fees and added to your loan.
A renewal sometimes comes with a small “payout”, which represents a portion of the principal you have paid off already as installments in the last few months. In this case, the loan amount will typically reset to the original amount that you borrowed, or it may even get increased.
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