If you need quick cash to cover an unexpected expense, you may have heard that a personal “installment” loan can be a good way to go—but you might not know much about it. What is an installment loan, how does it work, and how is it different from other types of loans such as payday loans?
Let’s walk through the basics to help you decide if an installment loan is right for your financial needs.
What is an installment loan?
All loans involve the transfer of money from a lender to a borrower, with the understanding that the money will be repaid. Borrowers pay interest—a percentage of the borrowed amount—to the lender as compensation for the loan. Loans have a maturity date by which the borrower must repay the funds.
The definition of “installment loan” is based on its repayment schedule. Installment loans have a fixed number of scheduled payments (or installments), allowing you to repay the lender with regular payments over a period of time. There are several types of installment loans, including auto loans, mortgages and personal loans.
Personal installment loans, usually just called personal loans, can be helpful in a variety of situations. People often use them to consolidate other debt (like credit cards) or cover an emergency expense, such as medical payments, car repairs or unexpected bills.
Installment loans vs. credit cards
Credit cards are considered revolving debt vs. installment debt, because you can continuously make purchases (i.e. borrow money) on a credit card until it’s maxed out. Installment loans, on the other hand, don’t allow you to continuously borrow more money. You know when your payoff date is, so you know exactly when you’ll be done with your debt.
Many people find that installment loans keep them in check more than credit cards, because it removes the temptation to keep borrowing money. Unless you’re disciplined, credit cards can create a vicious cycle where you’re constantly in debt.
What’s the difference between a payday loan and an installment loan?
A payday loan (also known as a payday advance) is a small, short-term loan intended to cover unexpected expenses that can’t wait until you receive your next paycheck. Lenders typically charge a fixed fee based on the amount borrowed, and you have until your next payday to pay off the amount borrowed plus the fee.
There are a few key differences between payday loans and personal installment loans. For one thing, installment loans are repaid over time through monthly or biweekly fixed payments, while payday loans are repaid all at once, usually within a few weeks of receiving the cash.
Because the lump sum is due relatively quickly, some borrowers find it difficult to repay a payday loan on time. The Consumer Financial Protection Bureau found in 2014 that over 80% of payday loans are rolled over or followed by another loan within 14 days.
“The biggest problem with payday loans is that you can’t pay them off gradually, like a mortgage or a car loan,” says Amy Livinston over at Money Crashers. “You have to come up with the whole sum, interest and principal, in just two weeks. For most borrowers, a lump sum this size is more than their budget can possibly handle – so they just renew their loans or take out new ones.” Since most payday lenders charge renewal fees and bounced check charges, this can create a cycle of debt that’s tough to escape.
The other big difference is that you can typically borrow less with a payday loan. For example, RISE offers personal installment loans between $500 and $5,000, while payday loans can range from $100 to $1,000, depending on state legal maximums.
Installment Loans vs. Payday Loans At-a-Glance
|Installment Loans||Payday Loans|
|Cost||A fixed interest rate based on your credit score and other financial info; typically lower APR than a payday loan.||Flat fee based on amount borrowed; typically higher APR than an installment loan|
|Amount||Ranges from a few hundred to several thousand dollars||Usually less than $1,000|
|Repayment Terms||Ranges from a few hundred to several thousand dollars||Your next payday|
|Payments||Biweekly or monthly fixed payments||One lump sum|
At RISE we believe everyone should have access to loans that meet their needs and support financial wellness. Rise is not a bank loan or a payday loan; it’s an online installment loan that can help you build credit.
With RISE, you borrow what you need, when you need it. With rates that can go down over time* and free access to your credit score, we help you take control of your debt. Apply for an online installment loan with RISE today.
* Customers in good standing may qualify for a reduction in annual percentage rate ("APR"). Installment Loan Customers: In order to be eligible, you must continue to meet RISE's credit criteria, and we will evaluate the stability of your personal information and identity for each new loan. If eligibility requirements are met and you make 24 successful, on-time monthly payments (48 bi-weekly payments), the APR for your next loan will be 50% off your original loan's APR (excluding customers with starting rates of less than 75%). Additionally, if you continue to meet eligibility requirements and you make 36 successful, on-time monthly payments (72 bi-weekly payments), you will qualify for a 36% APR for your next loan. Note that it may take two or more loans to reach 36% APR. In Mississippi, if you make 24 monthly payments (48 bi-weekly payments), the monthly handling for your next loan will be 50% off (excluding customers with starting rates of less than 75%). And, if you make 36 monthly payments (72 bi-weekly payments), you qualify for a monthly handling charge of 3% for your next loan with RISE. Note that it may take two or more loans to reach a 3% monthly handling charge.) Line of Credit Customers: In order to be eligible, you must continue to meet RISE's credit criteria, and we will evaluate the stability of your personal information and identity. If eligibility requirements are met and you make 24 successful, on-time monthly payments (48 bi-weekly payments), the APR on your line of credit will be reduced to 50% off your original APR. Additionally, if you continue to meet eligibility requirements and you make 36 successful, on-time monthly payments (72 bi-weekly payments), you will qualify for a 36% APR on your line of credit.