Payday loans are meant for folks who don’t have good credit or much credit history. They come with super high-interest rates, and the companies that offer them can be pretty sneaky. When people use these loans to pay for everyday stuff, it often ends up making their money problems even worse. Despite that, experts say the payday loan business is expected to grow by 5.1% this year.
If you’re in a financial predicament and need money fast, payday loans might seem like a quick fix. But in the long run, it’s usually smarter and cheaper to go for installment loans instead.
Understanding Payday Loans vs. Installment Loans
When it comes to getting quick cash, you’ve got two main options: payday loans and installment loans. They both help out when you’re in a pinch, but they work a bit differently.
Payday loans are usually smaller amounts, paid back all at once when you get your next paycheck. Installment loans, on the other hand, can be bigger and you pay them off bit by bit over time.
While both have their risks, installment loans are generally seen as safer than payday loans.
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Here’s a breakdown of payday loans versus installment loans:
| Aspect | Payday Loans | Installment Loans |
|---|---|---|
| Collateral Requirement | Secured; needs collateral | Unsecured; no collateral needed |
| Loan Amount | Usually $500 or less | Can be as high as $100,000 |
| Repayment Terms | One lump sum is due on your next payday | Paid gradually over several months or years |
| Interest and Fees | Up to 400% APR, varies by state of residence | Lower than payday loans, varies based on credit score |
So, with payday loans, you need to secure them with collateral, they’re smaller amounts, paid back all at once, but they come with sky-high interest rates. Installment loans, on the other hand, are bigger, paid off over time, and generally have lower interest rates, though they can vary depending on your credit score.
What Is Payday and Short-term loans?
Payday and short-term loans are like quick cash options where you don’t need to put up anything valuable. They’re usually for small amounts, around 500 bucks or less, but here’s the kicker – the interest rates can be crazy high, like more than four times what you borrowed, depending on where you live.
You’ve got to pay back the whole loan with your next paycheck. In some places, you can renew the loan if you need more time.
There are other short-term loans too:
Car title loans: You use your car’s title to get a quick loan, but if you don’t pay up within about a month, they can take your car.
Pawn shop loans: You hand over something valuable, like jewelry, and if you don’t pay back the loan, they keep your stuff.
What Are The Problems With Short-term Loans
Short-term loans, like payday loans, help out about 12 million Americans when they need cash fast, and you can get them in 38 states. But they can mess up your money situation for a few reasons:
- They take money straight from your bank account when it’s time to pay up. If you don’t have enough cash, you’ll get hit with extra fees from both your bank and the loan company.
- They’re easy to get, even if you’re not in a good financial spot. You just need a few documents, like ID and proof of a job. They don’t even check if you can afford to pay them back.
- They can trap you in a cycle of borrowing. If you’re always short on cash, you might end up taking out loan after loan. But every time you borrow more, you end up owing even more thanks to the crazy high interest rates.
- They’re expensive. The interest rates and fees are way higher than what you’d pay with other loans or credit cards.
Understanding Installment Loans
Installment loans are pretty common – they’re the kind of loans where you pay back a fixed amount every month, like for your car or house. You can borrow a little or a lot, and sometimes you need to put something valuable down as security.
With these loans, you know what you’re paying each month for a set time, usually a few years. Unlike payday loans, which can charge crazy high-interest rates, the average interest rate for personal installment loans is around 11.56 percent as of Jan. 3, 2024.
What Are The Risks Of Installment Loans
Getting any kind of loan comes with its own set of risks, and that includes installment loans:
- You might end up paying extra fees. Things like origination fees or charges for missing payments can make your loan more expensive than you planned.
- It could add to your overall debt load. Taking on more debt is always a bit risky, so you’ve got to be sure you can handle the repayments without it causing major money headaches later on. However, if you use an installment loan to consolidate your debt, it could help you bring down what you owe in the long run.
What Are The Things You Need To Know Before Applying For a Loan?
When you’re applying for an installment loan, make sure you have these things ready:
Loan Application: You can fill out the form online or in person, depending on where you’re getting the loan. Online lenders usually have a quick and easy form to fill out.
Loan Purpose: Some lenders might ask what you need the money for. This helps them decide how much to lend you and makes sure you’re using it for the right stuff.
Proof of Identity: You’ll need to show who you are with two forms of ID, like your driver’s license or passport.
Employment and Income Proof: They want to know you’ve got a job and can pay back the loan. So, be ready to show things like your pay stubs or bank statements.
Proof of Address: They’ll also want to know where you live. You can show this with stuff like your utility bill or lease agreement.
And remember, they’ll check your credit score to see if you’re good at paying back loans. Based on that, they’ll decide how much interest to charge you.
What Other Alternative Is Available?
If you need money fast but don’t want to go for payday or installment loans, there are other choices you can try:
Credit-builder loans: These are for people who don’t have much of a credit history. You get the money, but it’s locked away until you finish paying back the loan in installments.
Payday alternative loans (PALs): These are offered by credit unions and are for smaller amounts of money, usually less than $1,000. You pay them back over a few months.
Ask your boss for an advance: Some employers will give you part of your next paycheck early. But remember, this means you’ll get less money in your next paycheck.
Talk to your creditors about payment plans: If you owe money for things like medical bills or credit cards, you can try talking to the people you owe. They might be able to work out a plan with you to pay back what you owe in smaller amounts over time.
Conclusion
If you’re struggling with money and need it fast, remember that there are options beyond expensive payday loans. You could qualify for an installment loan with easier repayment terms and lower costs.
Even though short-term loans might seem like the quickest fix, it’s worth checking out other possibilities. You might find a better solution that helps you get back on track financially.