There may come a time when you need money to fund something big, and you don’t have the financial capacity to do so.
It can be buying a new car, planning your dream house, starting a business, or paying debts.
Loans can be a suitable option, particularly if you have a stable source of income or a good credit score.
However, loans come in different types, so it may be essential for you to know their differences before choosing one.
In this article, you’ll learn about installment loans vs. payday loans as an option when you need to make ends meet.
Both are personal loans but differ significantly in interest and how easily you can get approval.
You can expect quick approval for payday loans despite having a bad credit score, but their interest can be pretty high.
Meanwhile, installment loans can have stricter requirements but lower interest rates than payday loans.
If you choose between installment or payday loans, you may check out this guide to help you decide better.
What Is an Installment Loan?
Installment loans allow you to take a fixed amount of money you need to pay regularly.
The payment on each schedule is part of the principal amount you loaned and its interest.
Therefore, lenders determine the amount you must pay during your scheduled payment by including the principal amount, interest, and loan term.
Usually, borrowers must repay their installment loans monthly, depending on the discussed terms.
The payment amount is consistent throughout the loan term, so you can prepare how much to pay monthly.
Aside from the monthly dues, there may be upfront fees you need to pay when arranging your installment loan.
It includes loan origination, processing, and more fees.
You are also responsible for paying the penalty in case of late payments.
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What Are the Types of Installment Loans?
Installment loans are as surprising as you think and come in different types.
Personal, auto, mortgages, and student loans are some of the typical installment loans that you know.
Most of them have fixed rates, meaning the interest lenders charge you is the same as when lending.
However, mortgages and a few installment loans can be variable-rate which means that the interest rate may change over time.
You may know more about which type of installment loan may fit your needs with the help of this list below:
This loan is the best if you are looking for a loan option to help you with medical bills, weddings, debts, and other personal expenses.
You can apply for it at banks or credit unions.
Still, there are also online lenders to make transactions quick.
The money you can get will depend on your credit score, and personal loans can vary in interest rates too.
Auto loans lean more on funding your vehicle purchase, wherein your car is the collateral in the transaction.
If you fail to pay your loans in time, the lenders will tow your car and claim them.
An auto loan is a secured loan with lower interest rates than other loans.
For example, a four-year auto loan can have at least a 5% interest rate compared to a two-year personal loan with a 10% rate.
If you are looking for a loan to help you buy a house, you should get a mortgage.
This installment loan is secured, meaning they’ll take your house if you fail to pay it.
As the collateral to the lender, your house keeps the interest rates lower than unsecured loans.
You may also note that mortgage rates may change if a floating rate uses an index rate throughout.
Student loans allow higher education students to study by paying their colleges upfront.
The government or private lenders can issue student loans, depending on your preference.
They come in different payment terms, interest rates, and programs, so you may check them before choosing.
What Are Secured and Unsecured Installment Loans?
If the borrower fails to obey their loan obligations, secured loans need collateral or an asset to protect the lenders.
For example, if you loan to buy a car or house, the lenders will use them as collateral and hold their title.
Until you fully repay your loan, you can only have complete ownership of your car or house.
Aside from vehicles and houses, you can also find secured loans when purchasing properties, stocks, and bonds.
On the other hand, unsecured loans are pretty much the complete opposite of secured because they don’t use collateral.
For lenders, unsecured loans are riskier because they don’t have any assets to hold in case borrowers don’t pay.
It is mainly why credit cards, personal loans, and student loans have higher interest rates.
Lenders trust that you can pay your loans because you have stable financial resources.
Suppose you can’t qualify for an unsecured loan.
In that case, you can still get a secured loan, but you need something valuable as collateral.
How to Apply for an Installment Loan?
An installment loan starts by filling out an application from the lender, where you write out the necessary information.
It can include the installment loan you get, for example, a house.
Then, you may discuss with your lender the different options regarding rates, payment schedule, etc.
For instance, if you need at least $10,000 to start your business, your lender will begin discussing terms.
You can pay a higher down payment, but your monthly interest rate will be lower.
Or you can get lower interest rates if you get an installment loan with a longer term.
Once you settle the down payment, loan term, amount, and payment schedule, you will undergo screening.
The lender will verify your credit score and see if you have the qualifications for the loan you want.
It may also happen before you apply because your lender can offer you better options based on your credit score.
You can save interest charges if you pay off your loan before your loan term or payment schedule ends.
What Is a Payday Loan?
A payday loan is a short-term loan wherein the lender takes a portion of your income to get repayment.
They charge high-interest rates for a short-term loan so that you can refer to them as a cash advance.
The money you can borrow will depend on your source of income, and you need a pay stub during the application.
However, some states do not allow payday loans, such as West Virginia, Colorado, Arkansas, Maryland, Massachusetts, New Jersey, New York, and more.
Several laws regulate payday loan operations since they have expensive fees and interest rates.
Are Payday Loans Secured or Unsecured
Usually, payday loans are unsecured loans, so you don’t need to provide any assets or collateral to borrow money.
It is also secured because lenders may gain access to withdrawing money from your bank account.
For example, the lender electronically takes money from your account or writes a check with permission to pay for your loan.
Once your loan is due, the lender will encash the check, so in a way, they still have a hold of your asset.
However, some laws prohibit lenders from conditioning a payday loan on taking your salary through preauthorization.
How High Are Payday Loan Interest Rates?
Payday loans have a high-interest rate of up to 780% annually.
I think it’s clear that this is not good.
Some states have laws limiting interest rates to 30%, but payday lenders are exempt.
[Don’t get these loans. This is probably obvious based on the interest rates. It’s important that you learn personal finance!].
How to Apply for a Payday Loan?
The main requirement for a payday loan is your income or pay stub from your employer or company.
It helps lenders know how much you can borrow and take a portion of that amount to lend you.
They take the principal amount from a certain percentage of your income and then top it with the interest and other fees.
So despite most payday loans being unsecured, they still take the wages as collateral during the term.
Since it is a short-term loan, you may have to repay within 30 days, depending on your discussion.
Furthermore, you don’t have to worry about a low credit score because lenders don’t do a full credit check.
You can find payday lenders online or in physical stores where you can apply and get approval on-site.
Advantages: Installment Loan vs. Payday Loan
Installment loans have a fixed, regular payment schedule and interest rate, allowing you to budget.
You can create a timeline and allot funds for your loan repayment so unexpected expenses won’t put you off track.
Installment loans are almost all unsecured loans, so the amount of cash you can borrow can be enormous.
Funding something expensive, like a business, house, or car, is beneficial.
Payday loans are not picky regarding credit scores, so almost everyone can get loan approval.
You don’t have to fret about a low credit score or history with your cards because they don’t check it.
It is mainly because their “collateral” comes from your income, so they don’t mind your credit history.
Additionally, payday lenders are usually available online, so you can easily apply and get approval in minutes.
If you badly need cash or are in a rush to use it, payday loans can help you with it immediately.
Disadvantages: Installment Loan vs. Payday Loan
Despite the advantages of taking out an installment loan, you’ll find some disadvantages that can be a deal breaker.
Granters will only approve your application if you have a good credit score and history, so they know you can pay.
So if you have a terrible record of credit transactions, then installment loans may not work for you.
This other advantage can either be an advantage or disadvantage, but you’ll have longer repayment terms.
It means that the longer you have to pay for your loan, the more the overall interest rate you pay.
These payment schedules and rates don’t change over time, and you cannot make amends to adjust them.
Payday loans can be disadvantageous to people who cannot pay a high-interest rate in a short time.
Usually, payday loans need repayment within 30 days.
Hence, you must be ready to pay the interest on top of the principal amount.
Although it is common for lenders not to thoroughly check the score, it is best not to apply if you can’t pay on time.
You’ll have to pay additional fees on your next payday if you fail to do so, which can be costly.
There are laws regarding payday loans, but it would help to carefully read the terms before signing a loan.
It can help you know your rights as the borrower and determine payment terms to avoid additional fees.
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Where Can I Get an Installment Loan?
5KFunds is an excellent company with a good reputation in the lending industry because of its different services.
They have a free loan comparison to let you decide the best loan option for you among 100 approved lenders.
The loan approval is also quick because you can get one as early as one business day.
They also have repayment terms lasting up to 72 months with an annual percentage rate (APR) of 5.99%.
SoFi or Social Finance Inc. started lending services in 2011 by providing student loans for Stanford students.
Despite being new in the marketplace, they already offer other installment loans like personal, mortgages, and more.
You can borrow up to $100,000 with an APR starting at 7.99% to invest in your future.
Another trusted lending company in the industry is Upgrade that already entertained over 8 million loan applications in the past years.
Their online banking system allows them to transfer loans quickly, so you don’t wait very long.
If you want to take a personal loan, you can avail of up to $50,000 in certain states in the US.
Aside from their loan services, they also offer credit monitoring so you can manage your score.
They are outstanding in consolidating card transactions, so you can transfer balances from high-interest cards to lower rates.
SecureSpeedyLoans lives up to its name because they offer quick loans up to $35,000 from its trusted lenders online.
You can feel safe and secure with their online application because they can give results within minutes.
They will help you compare the best loan rates to get the best deal before taking an offer.
SecureSpeedyLoans has partnerships with various trusted lenders within 50 states, making cash out possible the next day.
Where Can I Get a Payday Loan?
As BadCreditLoans says in their company name, they help those with bad credit scores and improve their rating.
Even without a payday loan, they can assist your credit rating so you can access more loan options.
Because credit history is a significant factor in approving any loan, they’ll get your records back on track.
With their fast funding, you can borrow up to $10,000, and some terms can extend up to 36 months.
So if you have a score of 500 or lower, you can still get at least a $500 loan from them.
MoneyKey arranges installment and payday loans from $200 to $2,000, depending on your state.
The repayment schedule starts with your next payday, and the remaining loan payments depend on your pay frequency.
You can also pay a loan earlier than your scheduled repayment without additional fees.
Opploans is your best option for a quick loan payout if you need a rush of funding.
They are customer-friendly and offer better repayment terms than payday loans or cash advances for those with terrible credit scores.
However, you may expect a higher interest rate compared to installment loans.
The highest APR OppLoans has 160%, with loans from $500 to $4,000.
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I do not advise payday loans. As much as possible, avoid getting a payday loan if you do not need rush money.
If you know you can qualify for an installment loan, it is a better choice.
Even if it has a longer repayment term, you won’t still be in bankruptcy, debt, or lawsuits.
Installment loans can also let you plan your budget, so you don’t have to experience drowning in loan debt.
However, a payday loan isn’t bad if you need a small amount of cash and you are sure you can pay on your next payday.
So remember, if you need a large sum of money, go for installment loans. If you need quick cash, then choose a payday loan.
It would be best if you still weighed the reason for borrowing, rates, and payment terms.
It can help you decide the best choice for your needs to avoid further financial problems.