What is the difference between pay day loans and installment loans? We’ll cover the biggest differences between the two financial products. We’ll also share the biggest similarities between installment loans and payday loans.
Loan Amount
Installment loans may be for small amounts, but you can get an installment loan that is far larger than a payday loan. After all, the payday loan is limited to a fraction of your take home pay. An installment loan is intended to be paid off in part every two to four weeks. For example, a payday loan may be limited to 1000 or 2000 dollars by state law. An installment loan could in theory hit 10,000 dollars.
Payment Periods
Payday loans are due when you receive your next pay check. Installment loans may have a payment due every pay period, but the payments are expected to take place over several weeks or month. This means that you don’t have to pay it off with your next pay check. In summary, both payday loans and installment loans are short-term loans. This is in sharp contrast to long-term loans like car loans and home loans intended to be paid off over years.
Availability
Installment loans are available in fewer states than payday loans due to a variety of legal quirks. They are offered in Texas, California and a few other states. This means that many more installment loans are issued through online lenders, whereas customers can find payday lenders in many stores and retail storefronts. When you apply for installment loan online, make certain that the transaction is legal in your state and that the lender is a real financial institution. You can’t afford to be a victim of identity theft when you’re already in a dire need for financial assistance. However, that’s always true. Work with legitimate lenders to take advantage of these services.
How are payday loans and installment loans similar?
Lenders who offer installment loans often offer payday loans as well. Neither type of loan depends on your credit except for the payment history you have with that particular lender. Neither loan depends on your credit score. In general, both are available to adults old enough to issue a contract as long as they have a valid pay stub and open bank account. Both come with moderately high fees and interest rates, though this offsets the relatively high rate of collections and defaults they deal with.
Both payday loans and installment loans are unsecured. While the creditor can sue you for the unpaid balance and eventually garnish your wages to be repaid, they can’t take your property to do so. This is in sharp contrast to title loans. If you are late paying the title loan, your car could be legally sold out from
under you. They could repossess the car because you’re a day late or failed to pay 30 dollars in fees. Making matters worse, you could lose your car and all the equity in it for an outstanding debt worth a fraction of the item’s value. This is why people often sell items online or to pawn shops to avoid title loans.
Unfortunately, not all of us have items to sell at short notice or may not have items worth a significant amount to sell. Nor does everyone have friends and family they can ask for money when they’re in a difficult situation. You might have a close circle that wants to help but is as financially strapped as you are. This creates demand for both installment loans and payday loans.
Payday loans and installment loans may be cleared in a matter of minutes. Note that you want to work with lenders that vet customers, since those with stricter lending standards will suffer fewer defaults. This results in lower fees and a lower interest rate. With these lenders, the money tends to show up the next business day. Avoid lenders who promise money in five minutes. These are the websites most likely to steal your identity and drain your bank account, and there isn’t anything you can do about it after the fact.
Expect to need to show documentation proving your identity like your state ID or driver’s license. These loans are limited to American citizens or legal residents. Expect to give them contact information like an email address and phone number, and know that they will contact you if you’re late with a payment. They will both reject your loan request if they can’t verify your contact information.
Neither loan requires a co-signer, though that is a useful backstop. Your friends and family can help you pay off the loan if need be. Conversely, a 19 year old with a good job can get an installment loan even if they don’t have a consigner or credit score. Know that defaulting on a payday or installment loan will be reported to credit bureaus and hurt your credit score.
Both payday and installment lenders often work with people who have bad credit. They’re willing to offer loans as long as you are probably able to pay it back. Both types of loans can be renewed for another term, though this comes with significant fees. The interest in each case can end up being greater than the loan amount if you continue to renew the loan month after month.
Both installment loans and pay day loans tend to be paid out of the same bank account that they deposited the money into. Monitor your account balance so that they can withdraw the next payment without triggering bounced check fees on your part. Recognize that they may sweep the account first thing that day, and that may cause issues if your paycheck clears later in the day or you hit the ATM.
Once the money is deposited in your account, it is yours to do with as you choose. You can withdraw cash to pay a tow truck or pay off other debts. This is in sharp contrast to credit cards that limit how much cash you can withdraw via a cash advance.