With so many different types of loans available it’s easy to get confused.

From payday loans to mortgages to auto loans to personal loans – there is no shortage of loan options. Of course, each type of loan has its own unique aspects, catering to different financial situations.

One type of loan that often causes confusion is an installment loan. Many loans appear to be an installment loan as they all require repayments on a set schedule.

For instance, you pay your mortgage loan each month, technically making it an installment loan.

But there are also short-term installment loans, payday installment loans, and many others. It’s easy to see why they cause so much confusion! Let’s take a closer look at installment loans and payday loans to clear up any confusion surrounding each loan type.

What is a Payday Loan?

Payday loans are a short-term loan that are typically repaid in a single lump sum. The repayment date is usually no longer than a month and falls on the borrower’s payday – hence the name payday loan.

There are fewer restrictions for payday loans but that means they also cost more. For instance, there is often an initial fee, high interest fees, and then a late fee if you miss repayment.

What are the benefits of a payday loan?

Payday loans carry a negative stigma but they can be beneficial in certain situations:

  • Less checks makes them easier to obtain – Payday loans often don’t have credit checks so people that struggle to get a loan can usually receive one.
  • Fast processing – You get a payday loan into your account as quickly as 24 hours, which is great for financial emergencies where you need cash asap.
  • Lots of options – There are many payday loan companies in each city, making it easier to shop around for the best loan terms.

What the Drawbacks of a payday loan?

Payday loans are not risk-free and need to be used carefully. Drawbacks of a payday loan include:

  • Costly loan – Higher interest and loaning fees mean you pay much more for less money compared to other types of loans.
  • Unreputable lenders -There are unfortunately many unreputable payday loan companies that can try to scam the borrower.
  • Missing repayments is dangerous – The biggest risk of a payday loan is missing a repayment, as this leads to high fees that need more money to pay off. Many use multiple payday loans to cover repaying others.

What is an Installment Loan?

An installment loan is a type of unsecured loan. These loans feature regular repayment schedules along with some interest on top. While interest is higher compared to certain loans, installment loan interest is lower than the interest for a payday loan.

The repayment installments are agreed before the loan is cleared so that borrowers know exactly how much it costs. Installment loans are varied, with everything from an auto loan to mortgage technically being an installment loan.

However, a mortgage or auto installment loan is secured. Newer instalment loans now include unsecured loans, meaning they don’t require collateral.

Many borrowers are now offering installment loans that are somewhat similar to payday loans. The main difference with these is that you repay over several installments rather than all at once on your payday.

Advantages of an Installment Loan

Installment loans have various advantages that often make them a better option than a payday loan. This includes:

  • Regular monthly repayments – Repayments for the loan are fixed to a set amount each month. This means you know exactly when every instalment is due and how much it costs.
  • Longer repayment – Because installment loans are repaid over several months it’s easier to manage the repayments.
  • Relatively fast clearance– Most installment loans are cleared relatively quickly, often within a few days. This is useful in situations where you need fast access to cash.

Drawbacks of an Installment Loan

Like any type of loan, installment loans have their drawbacks, including:

  • High interest – Installment loans have some of the highest APRs, so the cost of borrowing is higher compared to other loans. These rates aren’t as high as a payday loan but because there are more installments to repay it may end up costing more.
  • Late Fees – Like a payday loan, installment loans have high penalties for late repayments. This means the loan may end up costing significantly more if any repayment installments are missed.
  • May require collateral – Some installment loans require collateral to cover the risk of the loan. If you fail to repay then the collateral is taken to cover the cost. This means you could have your car or home repossessed if used as collateral.

What are the Main Differences Between Payday Vs Installment Loans?

  Payday Loan Instalment Loan
Loan Amount $100 – $1500 $150 – $2,500
Loan Length 2-4 weeks in most cases Anywhere from 2-6 months
Average APR Varies from state to state but can reach between 300-700% Between 25-150%
Time for Loan to Clear Varies from borrower but often within 24 hours. This is mostly because fewer checks are required. Usually between 2-3 days depending on how many checks are required.
Approval Processes Based on your current employment status. There are typically no credit checks or tele track needed for loan approval.   More checks in place for approval, such as using net income minus expenses to determine suitability.
Available for Poor Credit Yes, many payday loans are specifically designed for people with poor credit. Yes, but not as readily as payday loans. Those that do feature higher interest rates.
Impact on Credit Score Can have negative impact if repayments are missed and loan defaults. Credit is reported during instalment repayments, so making payment on time can improve your credit score

Installment Vs Payday Loan – Which is Better?

There are various factors that determine which type of loan is better. Here are some things that may influence the suitability of each loan for you:

How Much Do You Need to Loan?

If the loan you need is a small amount then a payday loan may be the better option as you can repay it in one go without incurring too much extra costs from interest.

Instalment loans are better suited if you need to borrow more. This is because you can better budget for instalments as you have more time to repay the loan.

How is Your Credit Rating?

If you have a good credit rating then you should avoid payday loans as they may have a negative impact on it.

Anyone with a bad credit rating may need to go for a payday loan as they have fewer restrictions in place.

How Soon Can You Repay it?

If you can repay within a month then a payday loan is a good option. If you need more time to repay then instalment loans are better suited.