Loans are arguably one of the most misconstrued aspects of the multi-faceted financial world. For some, they are a semblance of the road that eventually leads to financial security. Applying for a loan to them is the first step of starting a lucrative investment that will benefit generations to come. For others, however, loans are a monthly or weekly dose taken to cure a poor and impulsive spending habit. They see loans as the quickest way of getting that ‘much-needed’ cash to splurge on the latest smartphone or trending designer leather jacket.
Whichever way you choose to think of loans, one thing will still remain constant- they are of different types, with equally different terms. If you like to think of yourself as financially smart, then knowing the intricate differences between these two types, will go a long way in helping you make informed financial decisions.
Perhaps the only common thing that payday and installments loans share is the fact that both are valid ways of borrowing cash. After that, the differences start, which are highlighted by;
a.) Amount borrowed.
Payday loans, just as the name suggests, are meant to be paid back in full the next time the borrower receives his paycheck. It thus implies that it’s almost impossible to secure a payday loan that is bigger than your typical monthly or weekly earnings. The downside here is clear. You can only receive a fraction of your salary upfront as a soft loan if you decide to apply for a payday loan. On the other hand, installment loans are more flexible in terms of how much one could borrow at a go. With a good credit score, you can secure an installment loan totaling to several thousand pounds in one borrowing session. Thus, if you need some sizable amount of money to start a business, then applying for an installment loan using a direct lender, and avoiding a loan broker when possible might be your best option.
c.)The duration before payback.
Payday loans are short-term loans designed to paid back within 30-days. In most cases, the lending institution will deduct the amount borrowed plus any interest accrued automatically from the paycheck. It is also the reason for the smaller borrowing capacity allowed.
Installment loans, on the other side of the spectrum, are long-term debts where the borrower is obligated to pay the amount owed in gradual deposits over a comparatively longer period. Depending on the terms agreed upon when applying for the loan, you could settle the loan in a span of a few months to several years time.
c.) Collateral and security.
Payday loans are simply soft loans. You won’t need to surrender your log book or title deed to qualify for the loan. And you could also get the advance on your salary even with a poor credit score. The only proof required by the lending institution in such a case would be the proof that you’re in a stable employment and have the ability to settle your dues in time.
Installment loans are a bit more complex when it comes to securing the debt. But it all boils down to the duration of the loan, the lending institution, the borrower’s credit score and the amount borrowed. If have an exemplary score and can provide sufficient proof of employment or an existing checking/savings account, then it’s possible to borrow cash without any solid collateral or security. Nonetheless, first-time borrowers will often be required to deposit a sizable collateral against the loan received.
d.) Interest rates.
The interests rate or APR ( Annual Percentage Rates) that these loans are subjected to is the most distinguishing factor of the four. Both loans have high APRs, and that should be expected. If loans were easily available, then we would all be rich and the end result would be an inflated economy. Nevertheless, payday loans are notorious for their exploitatively interest rates. We’re talking about an APR of about 300-400%. Which could easily translate to paying back double the amount borrowed, if the loan is not settled within a week or two.
The APR of installment loans is less taxing, which could be anywhere between 25 -100%. The deal gets even better as the duration of paying back the loan increases In such a scenario, if you factor in economic inflation and an escalating cost of living, you will find yourself paying back almost the same amount borrowed in the first place.