Installment Loans vs Payday Loans

Differentiate between installment loans and payday loans through zaving's guidance, finding the loan structure that aligns with your repayment capacity.

Last updated by Zaving Editorial Team, on January 18th, 2024

Comparing installment loans and payday loans? Learn more about them. If you need some urgent cash to get you through a tight spot, you can turn to zaving to help you explore your options. Our online service makes applying for a loan quick, easy, and hassle-free. If your loan is approved, cash can land in your bank account straight away – it's as simple as that! Start the application process right here today with zaving.

What are payday loans and how do they work?

“Payday loans are short-term financial tools that offer quick access to small sums of money, typically ranging from a few hundred to a thousand dollars. They cater to immediate financial needs and are designed to be repaid on the borrower's next payday, usually within two to four weeks.

To obtain a payday loan, individuals usually provide proof of income and identification to the lender. Upon approval, they receive the loan amount and commit to repay it, along with fees and interest, by a specified due date. Repayment methods commonly involve an electronic debit from the borrower's bank account.

These loans are often accessible to individuals with various credit backgrounds, as they generally do not require extensive credit checks. However, they come with notably high fees and interest rates. Failing to repay the loan on time might lead to additional charges and can potentially initiate a cycle of borrowing, resulting in long-term financial challenges.”

What is the difference between payday loans and installment loans?

“The difference between payday loans and installment loans lies in several key aspects:

  • Loan structure: Payday loans are typically short-term loans, due on the borrower's next payday, usually within a few weeks, while installment loans offer a longer repayment period, spanning months or years, with regular, fixed payments.
  • Loan amount and repayment: Payday loans are usually small-dollar loans, often ranging from $100 to $1,000, whereas installment loans offer larger sums, sometimes ranging from hundreds to thousands of dollars, providing borrowers with more significant funds and extended repayment periods.
  • Repayment schedule: Payday loans often require borrowers to repay the entire loan, including fees and interest, in one lump sum on the due date. In contrast, installment loans divide the total amount borrowed into smaller, manageable installments, making it easier for borrowers to budget and repay over time.
  • Interest rates: Payday loans often come with higher interest rates due to their short-term nature, resulting in higher annual percentage rates (APRs). Installment loans typically have lower interest rates as they are spread over a longer repayment period.
  • Approval process: Payday loans usually have a faster approval process, sometimes without extensive credit checks, relying more on the borrower's income and employment status. Installment loans may involve a more thorough credit check and documentation to assess the borrower's creditworthiness.
 

Understanding these distinctions can help borrowers choose the most suitable loan type based on their financial needs, repayment capability, and the urgency of funds required. “

What are the pros and cons of payday loans?

“Exploring the nuances of payday loans is crucial before considering them as a financial solution. Here's an overview of the advantages and drawbacks associated with these short-term borrowing options:

Pros:

  • Immediate cash access: Payday loans offer quick access to funds, usually within 24 hours, addressing urgent financial needs or unforeseen emergencies.
  • No stringent credit check: Approval for payday loans doesn't heavily hinge on credit scores, enabling individuals with poor or no credit history to qualify.
  • Simple application process: Securing a payday loan often involves a straightforward application with minimal paperwork, ensuring accessibility for borrowers.

Cons:

  • High interest rates: Payday loans come with steep interest rates, often exceeding 300% APR, making them an expensive borrowing choice.
  • Brief repayment period: Due on the borrower's next payday, these loans offer a short repayment window that can lead to a cycle of debt if not managed promptly.
  • Predatory practices: Certain payday lenders engage in exploitative practices, charging excessive fees and targeting vulnerable individuals.”

More of your frequently asked questions about payday loans

Can I get a payday loan with bad credit?

Yes, obtaining a payday loan with bad credit is feasible as payday lenders prioritize income and employment status over credit history when evaluating loan applicants. Those with poor or no credit history often qualify for these short-term loans based on their ability to repay from their upcoming paycheck. Payday lenders typically verify a consistent income source, often through pay stubs or bank statements. However, it's crucial to note that while bad credit may not be a barrier to eligibility, approval and loan terms can differ significantly among lenders, potentially resulting in higher interest rates or more rigid conditions.

Can I apply for multiple payday loans at once?

Though technically possible, obtaining multiple payday loans simultaneously is usually discouraged and regulated by payday lending protocols. Responsible lenders typically evaluate an applicant's existing loans and might decline a new loan application if there's an outstanding payday loan in place. This measure is aimed at discouraging borrowers from accruing multiple loans simultaneously to avoid potential cycles of indebtedness. Additionally, managing numerous concurrent payday loans can impose significant financial strain due to the high-interest rates and brief repayment terms associated with these loans.

What if I can't repay my payday loan?

In the event that repaying your payday loan on time becomes problematic, it's vital to promptly engage with your lender and explain your predicament. Several lenders provide assistance to borrowers encountering repayment difficulties by considering options like extending the loan term, arranging feasible repayment schedules, or exploring alternative solutions. Disregarding this issue might result in incurring extra fees, increased interest rates, or adverse credit bureau reports, potentially impacting your credit score negatively.

Are payday loans available in all U.S. states?

No, payday loans are not available across all U.S. states. Currently, in 2023, 18 states and the District of Columbia have prohibited payday loans, while the other 32 states and Puerto Rico have laws permitting their operation, subject to different constraints.