There are many ways to borrow money. You could turn to friends or family, a credit card, your employer, banks, credit unions, online lenders, or another financial institution. However, those with no credit or poor credit may have limited options to choose from, particularly when they quickly need to borrow money for an emergency expense.

 

If you’re faced with this predicament, you may be considering an installment loan or a payday loan. Learning the differences between a payday loan and installment loan can help you compare your options and determine which type of loan is best for you.

 

Installment loans vs. payday loans

Before delving into details, here’s a quick overview of the main differences between payday loans and installment loans.

 

 

Installment loans

Payday loans

Loan amounts

From several hundred dollars to hundreds of thousands.

There’s often a low limit, such as $500 or $1,000.

Loan terms

Could be several months to many years.

Very short terms, usually ranging from 10 to 31 days.

Cost of borrowing

From around 3% APR for secured loans up to several hundred percent APR for some unsecured loans.

The fees and short term generally result in a high APR of around 400% to 520% for a 14-day loan.

Credit check

There will likely be a credit check and your rate and terms can depend on your creditworthiness.

The lender may verify your income or bank account, but often won’t check your consumer credit reports.

 

What is an installment loan?

An installment loan is a type of loan that you repay with fixed and regular payments over a predetermined period (called a term). Many financial institutions offer installment loans, including banks, credit unions, and online-only lenders. Installment loans may also have other names when they’re issued for a specific purpose, such as auto loans, student loans, mortgages, and personal loans.

 

Installment loans generally share a few characteristics:

  • You receive your loan amount as a lump sum.
  • You make fixed periodic payments, and portions of each payment go towards your loan’s principal balance and the interest that’s accumulated.
  • Your account will close once you repay your loan in full.

 

By contrast, a revolving credit line, such as a credit card, allows you to borrow against your credit line, repay the amount you borrowed, and then borrow again without having to reapply for an account. Your payments on a revolving account also might not be fixed, although there could be a minimum payment requirement.

 

There are secured and unsecured installment loans

There are several types of installment loans to compare and consider. For example, you may be able to get a secured or an unsecured installment loan and might be able to choose a fixed or variable interest rate.

 

  • Secured loans require you put up collateral to borrow money. For example, an auto loan is a secured installment loan that uses your vehicle as collateral, while a pawn shop will hold your possession as collateral for a pawn loan. If you fall behind on your payments, the lender may be able to take your collateral.
  • Unsecured loans, such as a student loan or personal loan, don’t require collateral. Falling behind on payments could hurt your credit, result in fees, and may lead to the lender suing you and garnishing your wages, but lenders generally can’t take your possessions since you never put up collateral.

                                            

It may be easier to get a secured loan, and secured loans generally offer a lower interest rate than unsecured loans. However, you risk losing your property with secured loans, and it may be worth paying a little more to get an unsecured loan.

 

You may also be able to choose a fixed- or variable-rate installment loan

Installment loans are also often offered with either a fixed interest rate or a variable interest rate.

 

  • Fixed-rate loans lock in your interest rate once you take out the loan.  
  • Variable-rate loans often start with a lower interest rate than fixed-rate loans, but their rate and your payment amount may increase or decrease over time.

 

While a variable-rate loan might save you money, it’s riskier because you don’t know if your rate will rise in the future. If you want certainty, a fixed-rate loan could be best. But, if you think you can quickly repay the loan and take advantage of the lower initial rate, or you have enough income to cover high payments if rates rise, a variable-rate loan could be a good option.

 

Qualifying for an installment loan

Installment loans are generally credit-based loans, meaning your income, outstanding debts, credit history, credit scores, and other factors can influence your ability to get the loan and your rates and terms.

 

Those with excellent credit may qualify for an unsecured personal loan with an annual percentage rate (APR) around 3% to 6%, while the rate for someone with good credit may be as high as 36%.

 

Lenders may charge you an origination fee, often a percentage of your loan amount. Also, some installment loans have a prepayment penalty that you must pay if you repay your loan before the end of its term.

                                                                               

If you don’t have good to excellent credit, you may need to look for an installment loan from lenders that specialize service applicants with poor or no credit.

 

What is a payday loan?

Payday loans are another option if you’re looking to borrow money and don’t have credit or are working to improve your credit. Payday loans are often short-term, high-rate loans. They could have a term of 31 days or fewer, and on average have an APR of around 400% to 520% percent.

 

Generally, when you take out a payday loan, you’ll give the lender a post-dated check or electronic access to your bank account. You agree that at the end of your loan’s term, the lender can deposit the check or withdraw the money from your account.

 

Payday loans often charge a fee rather than interest. For example, you may have to pay a $15 fee per $100 you borrow, and your check will be for $115, but you receive $100. By federal law, payday lenders must disclose the APR of your loan, which you can use to compare your loan options among lenders and loan types.

 

Qualifying for payday loans

A payday loan application may not involve a credit check, but your application could get denied if you don’t meet the lender’s requirements. You might be turned down if you’re not at least 18 years old, don’t have a steady job or income, your income is too low, or you’ve recently bounced a check or declared bankruptcy.

 

State laws may also limit how much money you can borrow with payday loans, how many payday loans you can have at once, the loan’s terms, and the maximum fees or interest that the lenders can charge. The state may require payday lenders to subscribe to and check a centralized database before approving a payday loan application. And in some states, payday loans are outlawed altogether.

 

What about a payday installment loan?

In recent years, high-rate installment loans have emerged as an alternative to payday loans. Some lenders may offer these payday installment loans, as they’re sometimes called, to get around payday loan regulations, and the loans may have APRs as high as (or higher) than payday loans.

 

One of the differences between payday loans and installment loans are the loans’ term. Payday installment loans generally have longer terms. While a longer term can result in lower payments which may be easier to manage, it can also lead to paying more interest overall.

 

If you find yourself debating installment loan vs payday loan, you may want to consider an alternative to a high-rate installment loan. For example, some credit unions offer payday alternative loans (PALs), which allow applicants who don’t have good credit to borrow $200 to $1,000 with a maximum 28% APR. But, you may need to be a member of the credit union for at least a month to qualify.

 

RISE loans

RISE is an online lender that offers installment loans and lines of credit. It specializes in lending to those who with modest incomes who may have had credit trouble in the past and could find it difficult to qualify for a loan elsewhere.

 

As a result, the interest rate on the loans can be high. Therefore, using a RISE loan to pay for an unnecessary consumer product or experience may not be a wise financial decision.

However, a RISE loan could be a good fit for some borrowers. If you’re faced with an emergency expense, such as needing to repair your vehicle so you can get to work, a RISE loan could be an easier, faster, and less expensive alternative to payday loans and payday installment loans. RISE also checks applicants’ credit to help ensure borrowers will be able to repay the loan.

In addition to loans, RISE offers tools and resources you can use to improve your financial wellness and get free access to a credit score. Plus, when you repay your RISE loan, we report your payments to one or more credit bureaus which could help you build credit and improve your credit scores.

 

 

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