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Payday Loan vs Installment Loan: The Differences and Similarities

Comparing a Payday Loan vs Installment Loan
Jason Steele
Jason SteeleUpdated February 27, 2023
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If you need money right away, you may be considering a payday loan. But these loans can be risky because they come with high costs and short repayment terms. Installment loans are generally a safer bet. But what exactly is a payday loan vs. an installment loan?There are some major differences between an installment loan vs. a payday loan. Here, we take a closer look at these loans — plus what you need to know to choose the right type for your needs.

What Are Installment Loans?

Installment loans are loans that you repay in increments. Examples of installment loans include mortgage loans, car loans, and personal loans. With an installment loan, you receive a lump sum of money that you repay monthly over the term of the loan. Installment loan terms can range from a few months or years, to several decades in the case of a mortgage. Installment loans may be secured or unsecured.Installment loans typically have much lower interest rates and fees than payday loans. For example, they may come with origination fees to cover loan processing costs that generally range from about 1% to 5%. 

What Are Payday Loans?

A payday loan is a short-term loan with high costs that’s due when you get your next paycheck. The principal amount you borrow is part of your paycheck, and it’s usually several hundred dollars or less. Different states have varying regulations on payday loans, and some states prohibit them. Payday loan lenders usually don’t consider your credit history, credit score, or income when determining whether you’re eligible for a loan. Typically, all you need for a payday loan is a form of ID and payment information like your bank account. Some payday lenders may require you to write a check for the full loan amount plus fees in case you don’t repay the loan on time. Getting out of payday loans can be difficult because of the high interest rates they charge and the short repayment terms. Borrowers may take out new payday loans to help pay their existing loans, and become trapped in a cycle of debt. In some cases, payday loans are considered predatory lending. For instance, a payday lender may approve a borrower for more money than they know he or she can afford to repay.Another risky aspect of payday loans: Because borrowers are often required to give payday lenders information about their bank accounts, the lender might automatically withdraw money from the account when the payment is due. If the borrower’s account is too low to cover the withdrawal, they will likely have to pay an overdraft fee to the bank, plus a late fee to the payday lender.Recommended: Personal Loan Against Life Insurance Policy

Installment Loans vs Payday Loans

When it comes to an installment vs. a payday loan, there are some important differences between the two. Payday loans have very short repayment terms and higher interest rates than installment loans. They may have high fees as well. They involve no credit check, so almost anyone may qualify. Because they can be difficult to pay back so quickly, borrowers may fall into debt.Installment loans have lower interest rates and longer repayment terms, and you repay them in increments. And while they may come with fees, the fees are generally much lower than payday loan fees. Installment loans also have an approval process with requirements to meet, and lenders do a credit check.Here are some of the key differences between an installment loan vs. a payday loan:

Credit Score

Installment loans usually have a minimum credit score borrowers need to meet to qualify for the loan. Different lenders may require different minimum credit scores. Payday loan lenders typically don’t check your credit score or credit history. No minimum credit score is needed for payday loans.

Loan Amount

Payday loans are usually about $500 or less. You can get installment loans such as personal loans for amounts ranging from a few hundred dollars to tens of thousands of dollars.  

Interest Rates and APR

Installment loans have lower interest rates and APRs than payday loans. Payday loan interest rates can be extremely high, even up to 400% or more, which makes them very difficult to get out of if you fall behind.Recommended: Why Is Usury Illegal?

Loan Terms

Payday loans are due when you get your next paycheck, which is generally in a few weeks. Installment loan terms can typically be repaid over a number of months or years. 

Are Installment Loans and Personal Loans the Same Thing?

Is a personal loan an installment loan? Yes, it is. Personal loans are a type of installment loan. With a personal loan, you get a lump sum after being approved for the loan, and you pay it back over time with interest. A personal loan can be considered installment credit. This is different from revolving credit, where you have a credit limit, and as you pay down your balance, your credit increases. An example of revolving credit is a credit card.If you’re considering applying for a personal loan or installment loan, it’s helpful to consult the guide to personal loans to understand how these loans work. You’ll also discover what the requirements to get a personal loan are, and you can make sure to have all the necessary information on hand.  When filling out a personal loan application, you’ll typically need to list your name, Social Security number, address, income, and employment status. You’ll likely also need to provide several documents, such as proof of income, employment, and identity. Lenders consider several factors when deciding whether to approve you for a personal loan or an installment loan. Generally, they look for borrowers who have a good credit score and a strong credit history. If you are thinking of applying for online personal loans with average credit, your loan options may be more limited. However, a secured loan may be easier for you to qualify for because you use an asset as collateral to back the loan. If you default on the loan, the lender can take your asset to help recoup their assets. 

The Takeaway 

If you need money immediately and you’re debating over installment loans vs. payday loans, installment loans are typically the better choice. Payday loans have very high interest rates and fees and very short repayment terms. It can be easy for borrowers to fall into debt with payday loans. Installment loans, which have lower rates and fees and are repaid in increments over a number of months or years, are generally safer and less expensive.Personal loans are a type of installment loan you may want to consider. Be sure to shop around to find the best rates and terms. Lantern can help by simplifying the process for you. Just fill out one quick application, and you’ll get personal loan offers from multiple lenders in our network. That way, you can easily compare options and choose the right fit.

Frequently Asked Questions

What are the differences between a payday loan vs installment loan?
What are the similarities between a payday loan and an installment loan?
Is a payday loan the same as an installment loan?
Photo credit: iStock/marchmeena29

About the Author

Jason Steele

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
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