When you need access to quick funds for an emergency or to bridge a financial gap, payday loans and installment loans are two common short-term borrowing options. But is a payday loan or an installment loan the better choice for your situation?

Understanding the key differences between payday loans vs installment loans can help you make an informed decision when you need money quickly. This comprehensive guide examines how these financing products work, their pros and cons, costs, loan request requirements, and other factors to consider before borrowing.

What Are Payday Loans?

A payday loan, sometimes known as a cash advance or check loan, is a small, short-term unsecured loan designed to provide quick access to funds until your next paycheck arrives. Payday lenders offer small loans of $500 or less to be repaid in a single lump-sum payment by your next pay date, usually within 14-30 days. Please note, approval is not guaranteed and these loans are offered by independent lenders.

Payday loans are designed for ease of qualification with minimal paperwork, and you can see your loan options quickly. They require no collateral and lenders typically perform a soft credit evaluation (all credit types are welcome). All you need is a steady income source and valid ID. Simply provide proof of income and a post-dated check or electronic debit authorization for the full loan amount plus fees.

The quick convenience of payday loans comes at a cost, however. Interest rates typically range from 200% to 500% APR since all finance charges are packed into a 14-30 day repayment period. Additional fees may also apply. They are designed for short-term funding relief for a week or two, not long-term financing. Defaulting on payday loans triggers penalties and collection actions.

Payday loans are regulated under state laws with caps on maximum loan amounts, fees, and other consumer protections. Some states prohibit payday lending entirely. When used responsibly as a rare emergency solution and repaid on time, payday loans provide temporary funds until your next paycheck. If trapped in payday loan debt cycles long-term, however, their high costs quickly compound.

What Are Installment Loans?

Installment loans provide another option when you need short-term financing. With an installment loan, you borrow a larger amount of money upfront, typically from $1,000 to $5,000, which you repay in equal monthly installments over a fixed term, usually between 6 months to 24 months.

Installment lenders allow you to spread repayment over future pay dates, avoiding a single lump-sum balloon payment like with payday loans. Monthly payments include both principal to pay down the loan balance plus interest charges. Interest rates on installment loans range from around 25% to 200% APR depending on your creditworthiness, loan amount, and term length.

Installment loans undergo credit checks through the major credit reporting bureaus. While approval is not guaranteed, they often accept applicants with fair or poor credit that may not qualify for personal bank loans. Defaulting on payments leads to penalties, collection actions, and negative credit reporting that damages your score. If approved, on-time installment loan payments are reported to the credit bureaus each month, helping rebuild credit over the life of the loan.

Like payday loans, installment loans have caps and regulations that vary by state. Interest rates tend to be lower than payday loans, and spreading repayment over many months makes them more affordable for borrowers. If you need more significant financing and can qualify with fair credit or higher, installment loans provide an alternative to traditional bank loans.

Key Differences Between Payday vs. Installment Loans

Now that you understand the basics of payday and installment loans independently, let’s compare them head-to-head across some key factors:

Loan Amounts

  • Payday loans offer small loan amounts, usually $500 or less per loan. You may take out multiple loans, but it is discouraged.
  • Installment loans provide $1,000 to $5,000 or more if approved, so you can access larger lump sums for more substantial expenses and needs.

Approval Requirements

  • Payday lenders typically perform a soft credit evaluation (all credit types are welcome). They verify income, age, ID, and checking account information. You can see your loan options quickly, though approval is not guaranteed.
  • Installment lenders run hard credit checks and require fair/decent credit scores to qualify and obtain approval. The process takes 1-2 days.

Interest Rates and Fees

  • Payday loans carry extremely high APRs of 200-500%, plus origination fees. It works out to $15-$30 per $100 borrowed.
  • Installment loan APRs range from 25-200% based on various risk factors. Origination fees also apply but are lower than payday loan fees.

Repayment Terms

  • Payday loans require lump-sum repayment of principal + interest all at once by your next pay date in 14-30 days.
  • Installment loans allow principal + interest repayment in equal scheduled monthly payments over 6-24 months for more flexibility.

Credit Reporting

  • Payday lenders do not report loans or payment history to credit bureaus. On-time payments do not help credit scores.
  • Installment lenders report your payment history to credit bureaus each month. Making on-time payments helps improve your credit standing over the loan term.

Rollovers and Renewals

  • Payday loans may permit rollovers where you pay only the interest owed and extend the due date, potentially leading to spiraling interest costs over time.
  • Installment loans do not allow rollovers. You must repay principal every month. But you may be able to rework repayment terms if you cannot make payments.

When Should You Consider a Payday Loan?

Given their high costs, payday loans should only be used as an absolute last resort in emergency circumstances. If facing an urgent, short-term funding gap, and you have exhausted all other possibilities, a payday loan provides a quick temporary lifeline until your next paycheck.

Some situations where a payday loan may make sense include:

  • You need gas money or transportation costs to get to work before payday. No public transit options exist.
  • An essential utility bill payment like electricity is due before payday, and disconnection would be catastrophic.
  • An urgent, unexpected medical bill or prescription must be paid immediately and cannot wait.
  • You need to repair or replace a work tool/equipment vital to keeping your job.
  • You have unpaid traffic fines that could lead to suspension of your driver’s license before the next check.

In all cases, borrowers should have a feasible plan to fully repay the payday loan from their next income payment or quickly secure funds to pay it back. Rollovers and extensions should be avoided. Do not use payday loans for discretionary purchases or as a long-term solution for chronic funding shortages. Exhaust other options first, or the high interest costs will exacerbate financial problems.

When Might an Installment Loan Be a Better Option?

Installment loans provide more substantial funds over longer repayment periods. If facing a large, pressing expense you cannot cover from your next paycheck, an installment loan may work better if you qualify.

Some situations where installment loans may be preferable include:

  • You need to purchase a replacement vehicle for work and cannot save up the full amount before your existing car dies.
  • An emergency home or appliance repair exceeds $1,000 and needs immediate attention you cannot afford upfront.
  • You have incurred major medical expenses not fully covered by insurance that must be paid.
  • You need to consolidate and pay down high-interest credit card balances.
  • You want to fund vocational courses to increase future earning power.
  • You have an opportunity to invest in equipment that would let you launch a profitable side business.

As long as you budget carefully to make monthly payments until the loan is repaid, installment loans provide access to lump sums not feasible with payday loans. Just be sure to only borrow what you can realistically pay back based on your income and expenses. Like payday loans, defaulting on installment loans damages your credit and leads to collection headaches.

Payday vs. Installment Loan: Which Is Better for You?

There is no definitive answer to whether payday or installment loans are categorically “better” or “worse” financing options. Each product serves somewhat different needs and borrower circumstances. Here are a few key questions to help determine which fits your situation best if considering short-term lending:

  • How much money do you need to borrow? Payday loans are better for very small amounts under $500. Installment loans provide more substantial loan amounts.
  • How soon do you need funds? Payday lenders typically provide quick loan options, whereas installment loans usually take 1-2 days to process after credit evaluations.
  • What is your credit score rating? Payday lenders have no minimum credit requirements. Installment loans require fair/decent credit to qualify.
  • Can you repay the full balance plus fees by your next pay date? Payday loans require lump-sum payoff timed with your paycheck. Installment loans allow spreading repayment over 6+ months.
  • Will on-time payments help improve your credit? Payday lenders do not report payments to credit bureaus, whereas installment lenders do. Also, consider whether you need multiple loans or one larger lump sum; payday lenders typically discourage multiple concurrent loans, while installment loans can provide a larger single amount.
  • Can you afford the very high APRs on payday loans? Installment loan rates are high but not nearly as expensive as payday financing.
  • Are payday loans legal in your state? If banned, installment loans may be your only short-term borrowing option nearby.

The optimal solution depends entirely on your unique financial situation. For example, someone with very poor credit may qualify for payday loans but not installment loans. Conversely, if you need $3,000, a payday loan may not provide sufficient funds while an installment loan could offer a larger amount, subject to approval.

Evaluate your specific needs and compare costs carefully before making a decision. Never borrow more than you can realistically budget to repay on time under the loan terms to avoid traps of spiraling debt on either product. Payday and installment loans should be used as a last resort, not routine budget management.

Key Takeaways

  • Payday loans provide quick funds for short periods, but installment loans supply larger lump sums for more significant financing needs.
  • Payday loans cost much more in interest/fees due to very high rates over 14-30 days. Installment loan rates are high but spread over 6+ months.
  • Payday lenders typically perform a soft credit evaluation (all credit types are welcome), making the loan request process straightforward. Installment lenders conduct hard credit checks and require fair credit scores, but they may offer higher loan amounts compared to traditional loans.
  • Payday loans require full payoff by your next pay date. Installment loans allow spreading repayment over many months for easier budgeting.
  • Payday loans can trap borrowers who rollover or extend repeatedly into debt spirals. Installment loans have less flexibility but require principal paydown each month.
  • If you need quick funds in a true emergency and meet the requirements, payday loans can provide temporary relief until your next income deposit.
  • For larger borrowing needs over longer periods, installment loans are likely the better route for consumers who qualify with decent credit histories.

Frequently Asked Questions

Q: Are payday loans and installment loans the same thing?

A: No. Payday loans are smaller, repaid in a lump sum by your next pay date, typically without a hard credit check (all credit types are welcome), and are much more expensive. Installment loans involve credit checks, larger amounts repaid monthly over many months, and lower (but still high) rates.

Q: Which has higher interest rates, payday loans or installment loans?

A: Payday loans almost always have astronomically higher interest rates, frequently exceeding 400% APR. Installment loan rates are also high compared to traditional bank loans but lower than payday loans, in the range of 25-200% usually.

Q: Do payday or installment lenders run credit checks on applicants?

A: Payday lenders typically perform a soft credit evaluation (all credit types are welcome) so that even applicants with very poor credit can potentially qualify. Installment lenders do pull credit reports and require fair/decent credit scores for approval.

Q: Can you get a payday and installment loan at the same time?

A: Technically yes, but it is not recommended due to the high collective costs. Lenders discourage taking out multiple simultaneous payday loans as well. Only borrow what you can realistically budget to repay.

Q: Where can I get payday loans and installment loans?

A: Both are available from online lenders as well as in-person loan stores, depending on state laws. Interest rates from online lenders tend to be lower than those at payday or installment storefronts. Submitting a loan request online is the fastest process.

The Bottom Line

When facing an urgent need for funds, it can be tempting to rush into the quickest financing option without considering the costs or whether an alternative may better suit your needs. Avoid making desperate, rash borrowing decisions.

Carefully weigh all your options and the short- and long-term tradeoffs of payday loans versus installment loans. Making an informed choice helps ensure short-term borrowing provides relief rather than spiraling unmanageable debt burdens. With prudent planning, you can overcome financial hurdles and get back on the road to stability.

Samuel Mitchell