Choosing between the right loan for your need? Both Installment loans and Payday loans can be great options. Read along to find the best one for your needs.
Life is not always easy; sometimes, your expenses can exceed your income. You may need urgent cash for a medical purpose or go on that trip across Europe you have always been craving. Or, because of the pandemic, you are urgently in dire need of cash. This is when emergency financing comes into play. Two contenders offer loans for such situations, but they are known to carry high-interest rates, so in today’s article, we will dive deep into finding the perfect short-term loan and which one is the right choice to make in 2021.
Installment and payday loans
Before diving in, let’s discuss a bit on what these loans are. Their main differences and use cases.
An installment loan involves lending a high amount of money upfront to the borrower and giving them the set milestone to pay off the loan gradually. This type of loan typically comes in handy during short-term to long-term financial struggles, like a chronic medical illness or wedding planning. However, they allow for a higher sum of money means that the borrower has to prove their worth and credibility in repaying the loan in due time. This means fulfilling certain criteria, including the presence of a valid chequing bank account, a regular income source, and meeting the minimum salary requirement. An installment loan also requires collateral as a pledge, meaning if the borrower fails to pay off the loan, their valuable possession will be in the hand of the lender.
Payday loans, on the other hand, can be short-term loans with no credit checks. The amount a borrower receives is lower than installment loans, but It is easy to apply online, making it fast and reliable. Unlike Installment loans, Payday loans do not require collateral. This means that you don’t have to put up anything to secure the loan. This makes payday loans a less secure loan for the lenders. Payday loans also tend to have slightly higher interest rates than installment loans.
Loan Amount ( Winner: installment loan )
The obvious difference between a payday loan and an installment loan is the loan amount. Payday loans are short-term loans designed for immediate financial crunch. They usually start from $100 to $1500. In comparison, installment plans are meant for a long-term cash problem and offer $200 to several thousand dollars. The repayment process is also significantly different as payday loans are meant to be paid over months, whereas installment loans can often be paid over months. The lender has detailed information about the borrower. They can approve a loan because they have some security or asset that can decide that the borrower is eligible to repay the loan on time. Installment loans can only be approved if the lender is certain that the borrower will repay the loan.
So the clear winner here is the installment loan.
Loan fees & Charges ( winner: Tie )
Another major distinguishing factor between payday and installment loans is the interest rates they offer. A payday loan, a fast form of cash loan, has a higher interest rate than that of an installment loan. But the direct comparison does not give a fair picture, as I will explain later, but on paper, interest rates are lower in installment loans, but they have to be paid for a much longer period. The lender sets a small milestone for the borrower, and each month they have to pay that fixed amount; failure to do so will incur more fees and interests.
I have to give this round a tie as both have some unique set of features that makes them special. No clear winner, although the paper installment loan looks to have the edge.
Use case ( Winner: Payday loan)
Both payday and installment loans have distinctly different use cases. This Is where they differ the most. While payday loans are for urgent situations that require you to have the money within 24 hours, installment is more of a planned loan you apply for and can take a month to get approved. The short queue in getting the loan makes a payday loan much more useful and versatile than an installment loan that may often take months to get the money into your account. This alone makes a payday loan much more useful than an installment loan.
Requirements and difficulty to get the loans ( Winner: Payday loan)
One of the most important features of a payday loan is its ease of requirements; you need to have a checking account and proof of employment to get your payday loan approved. The best part is that you don’t need to have a good credit score, as most lenders do not check your credit score when approving your loan. Also, as mentioned earlier, there is no collateral needed, making it one of the most convenient loans for which to apply and get approved.
Installment loans on the other land have few more requirements. They need a good credit score and collateral to apply. This makes them fractionally harder and more time-consuming to apply and get approved for.
Payday loans clearly win this round.
Which is the better loan?
If you are keeping counts, the payday loan wins our comparison. But ultimately it boils down to your specific needs. Most people will prefer fast and convenient payday loans. They are easy to get approved for and need no credit check. At the same time, others will prefer headroom installment loans. They will find it more convenient to pay off the loan over a longer period.
So what do we recommend? We generally do not want anyone to get into a long-term loan as you may not be fully sure how your financial situation will turn out to be, so if you have some short-term financial problem, you can choose a payday loan. But ultimately you should choose the best one that serves your needs.