Unexpected expenses happen, and it is important to choose the right way to manage them. The most popular options for paying for emergencies are payday and installment loans. In the article, you can learn when and how to use these types of loans and make the right decision.
Payday Loans or Installment Loans?
Both installment loans and payday loans are often borrowed to pay for unexpected expenses. The two options allow you to get fast cash and pay for your needs. However, their loan terms, interest rates, available amounts, and other conditions differ. Therefore, it is important to compare these types of loans carefully to choose the most convenient one.
What Is a Payday Loan?
Payday loans are high-risk, short-term loans that people borrow to cover small unforeseen expenses and repay by their next payday. They are known for the simple application process, low requirements, and high interest.
Lenders don’t focus on your credit history when applying for payday loans. Instead, they pay attention to your income and ability to repay the debt. However, a consequence of easy access to funds is the high interest on these loans. For payday loans, borrowers need to pay near 400% APR (annual percentage rate), which significantly complicates loan repayment.
What Is an Installment Loan?
Installment loans are a less risky and more convenient type of loan compared to payday cash advances. You don’t need to repay the installment loan in 2-4 weeks, as it is in payday loans. Most lenders allow you to return the debt for up to 24 months, and in several cases, such as mortgages, the repayment period can reach 30 years.
Although installment loans are not the cheapest type of loan, they are still cheaper than payday loans, as their interest varies from 16% to 100%.
Pros of Payday Loans
Is a payday loan right for you? Pay attention to its main advantages:
- Easy access to cash;
- No hard credit check;
- Low requirements.
Cons of Payday Loans
Although a payday loan may be an excellent tool for borrowing extra cash, it still has several drawbacks:
- High-interest rates (400% APR);
- Risk of getting into a cycle of debts;
- Large amount unavailable;
- Risk of wage garnishment.
Pros of Installment Loans
If payday loans are too risky and expensive for you, pay attention to the advantages of installment loans.
- Lower interest rates;
- Flexible loan terms;
- Suitable for large amounts.
Cons of Installment Loans
Although installment loans are a cheaper way to borrow money compared to payday loans, it also has several drawbacks:
- Risk of hurting your credit score;
- Hard credit check;
- Longer repayment period.