Payday Loans vs. Installment Loans: What’s the Difference?

Looking to learn the difference between payday loans and installment loans? We’ll break it down for you.

Many Americans don’t have the cash to make ends meet when unexpected expenses arise. In fact, 58% of Americans have less than $1,000 in their savings account.

Throw in a potentially catastrophic life event — a hospital visit, a car accident, or even an appliance breaking down — and most Americans end up in a cash crunch.

If you have very little savings and life throws a wrench in the works, making ends meet can be tough. This is where payday loans and installment loans come into play.

Both payday loans and installment loans are personal loans that can be used to cover sudden expenses — even if you have bad credit. But what is the difference? Is one better than the other? (Spoiler alert: Yes, and there’s even a third option — paycheck advance apps).

Installment Loans vs. Payday Loans

Installment loans are a broad category that includes mortgages, car loans and other personal loans. They tend to be longer-term and require credit checks. Payday loans are technically a type of installment loan, but with a much shorter payment term, higher interest rates, and no credit check required. The payday loan industry has adopted the term “short-term installment loan” to try and avoid the stigma associated with payday loans.

At a Glance: Key Differences

There are several key differences between a personal installment loan and a payday loan. They include:

Payday loansInstallment loans
Loan amountLess than $1,000Can range anywhere from $500 to $100,000
Repayment termAre repaid as one lump sum on the next paydayThe repayment period is a fixed term set during the application process
Borrowing costIt can be more than 400% depending on your stateFixed; Usually lower than 36%, but how much you pay will depend on your credit score
Credit checkNo Yes
Does the lender have direct access to the checking account?YesNo
Secured or unsecured?Secured with your paycheck as collateralUnsecured; no collateral required
Origination feeNo, but there are a load of other fees including late fees and rollover feesMay charge an origination fee or application fee
Time to get your loan moneyNext business dayAs soon as the next business day up to a couple of weeks
Lender examplesSpeedyCash, CashUSA, Check into CashBanks, credit unions and websites including Badcreditloans.com, personalloans.com, Upstart and Upgrade
Disclaimer: Credit Summit may be affiliated with some of the companies mentioned in this article. Credit Summit may make money from advertisements or when you contact a company through our platform.

It’s easy to see which is better if you need a loan.

Which is Better: Payday Loans or Installment Loans?

This is pretty simple: anything is better than a payday loan. The installment loan will be a far better financial solution.

If you can qualify for a personal installment loan, 99% of the time you should choose that instead of taking out a payday loan. That payday loan will almost certainly lead to a mountain of debt, collection calls, lawsuits, and potentially even bankruptcy. When you’re out of the immediate crisis, focus on trying to save money instead.

Also, don’t fall for the term “short-term installment loan.” It’s just a payday loan.

Best Choice: Installment Loans

An installment loan can include all sorts of loans — mortgages, car loans, boat loans, etc. — but the types of installment loans that are comparable to payday loans are usually labeled “personal loans.”

As with any installment loan, you get a lump sum upfront. Then you’ll make a fixed monthly payment over the loan term. It might be three years for a car loan or 30 years for a mortgage loan. A personal installment loan is usually around 12 months.

Installment loans can be broken down into distinct categories, typically revolving around the reason for the loan, such as:

  • Mortgages
  • Auto loans or car loans
  • Student loans
  • Personal loans
  • Medical bills

Any legitimate personal installment loan will require a credit check and a fairly lengthy loan application process.

Interest rates on personal installment loans will be MUCH more favorable than on any payday loans — even if you have questionable credit.

Pro tip: Watch out for prepayment penalties. These are fees charged by some lenders when you pay off your loan early. They give borrowers an incentive to pay off loans over a longer term, thus paying more in interest. Confirm that your installment loan does not include a prepayment penalty before you complete the loan application.

Remember, all of this info is about real personal installment loans — not “short-term installment loans,” which is just a sneaky euphemism for “payday loans.”

Second Best Choice: Cash Advance Apps

You may have seen the TV ads for these apps. These are similar to payday loans — they’re sometimes even called paycheck advance apps — but there are a few key differences. There are no physical storefronts and they don’t usually charge interest. Instead, they ask you to pay a “tip.” They lend small amounts that are repaid from your next paycheck.

Requirements are minimal. Users typically only need a steady paycheck, a checking account with direct deposit, and a way to verify employment. They don’t usually check borrowers’ credit.

Some will charge a small monthly membership fee, ranging from $1 to $10 a month depending on the company and lending services you choose. Dave, Albert and Brigit are good choices.

READ MORE: Best cash advance apps

Learn more about cash advance apps by watching this video:

Option 3: Payday Loans

You want to avoid payday loans as much as possible. They are designed to be difficult to repay. In fact, they’re considered so dangerous that they’re outlawed in several states.

These short-term loans, usually for less than $1,000, are due on your next payday (hence the name). Often you will write a post-dated check or provide access to your bank account so that the lender can withdraw the funds on your next payday.

Your credit history usually doesn’t matter to payday lenders. This sometimes makes borrowers with bad credit feel like these loans are the only option (though they’re not. Cash advance apps are a better alternative).

The problem with payday loans is when you can’t pay them back. The repayment term is so short that most borrowers don’t have enough time to accrue enough cash to repay the loan. Lenders will allow you to roll over the loan and pay on the next payday — with more interest. Usually, they’ll throw in a few late fees as well.

The biggest problem is that payday loans have incredibly high interest rates — around 400% APR (annual percentage rate) on average. Not to mention that there are almost always penalties and fees associated with the loan.

What happens is that the interest snowballs so fast that you end up in what’s known as the payday loan trap. Many get stuck in vicious payday loan cycles and there are few ways out.

READ NEXT: Payday loan relief that works

Pro tip: Payday loans don’t require a credit check, which makes them super easy — too easy — to obtain. Avoid payday loans at all costs, and if you do take one out, be sure that you can pay it in full. Otherwise, you’ll end up in a world of hurt.

More Alternatives

Other alternatives include:

The Bottom Line

Even if you have bad credit, there are better options for you than payday loans. If you still opt to take out a payday loan, research the payday lender to ensure that you avoid tribal loans, and be sure that you can pay it in full. Definitely don’t take out a second payday loan. It’s not worth it. Instead, sign up for a cash advance app and use that instead for quick paycheck advances. Then, once your current crisis is over, focus on creating a small emergency fund. No matter how badly you need cash now, your situation will only get worse if you get trapped in a cycle of debt.

FAQs

Can I Have a Payday Loan and an Installment Loan at the Same Time?

In certain cases, you can have more than one loan at a time but ask yourself if you can balance the extra debt. You’re more likely to be cut off from obtaining multiple loans by the lender than the law. Don’t be surprised if a lender limits the number of loans or the total amount of money he/she will give you.

How Do I Check My Credit Report?

You’re entitled to one free copy of your credit report every 12 months from each of the three major credit bureaus: Experian, Equifax and TransUnion. Order online from the authorized annualcreditreport.com, according to the website www.ftc.gov for your free credit reports, or call 1-877-322-8228.

What’s the Difference Between Secured Loans and Unsecured Loans?

Secured loans are loans that are backed by collateral. The collateral can be property, a vehicle, or any other valuable asset that the lender can seize if the borrower fails to repay the loan. Unsecured loans, on the other hand, are not backed by collateral. Unsecured loans typically have higher interest rates and tougher eligibility criteria. Examples of unsecured loans include personal loans, credit cards, and student loans.

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