There are many ways to raise money to meet financial obligations when you fall short of finances. Financial experts recommend that you explore your options to make the right decision. If you need funds for school fees, capital for starting or expanding your business, or emergency expenses, you can opt for a payday or installment loan.
What is an Installment loan?
An installment loan is repayable within a fixed period, and in fixed regular installments monthly. It may be secured or unsecured. Financial institutions, credit unions, and online lenders offer installment loans.
These loans are typically used for larger purchases or borrowing needs, such as buying a car or paying for a home renovation project.
These are short-term loans that are repaid in a lump sum. Most borrowers repay the loan with paychecks on payday and may borrow again immediately. Those who qualify for the loans should be over eighteen years old, have proof of sources of income, and most lenders also ask for a statement of accounts for their checking accounts.
If you need fast access to cash, a payday loan might be your best recourse since it’s straightforward to qualify for. Many payday lenders do not perform a credit check, so getting a payday loan is possible even if you have bad credit or no credit history. Online loans Canada offers payday loans in three easy steps if you need access to cash.
Different clients have different financial needs. Some may prefer payday loans while others will opt for the installment loan. Choosing the best type of loan that suits your financial needs may be challenging. Knowing the differences between the two loans can make it easier to apply for the best loan for your financial needs. Below are the main differences between the two types of loans.
Differences between payday loans and installment loans
We will review both loans under various aspects that distinguish payday loans and installment loans. Similarities will also be based on these factors;
1. Loan amount and type
Payday loans are typically smaller, ranging from a few hundred to a few thousand dollars, while installment loans can be much larger, sometimes reaching into the tens of thousands of dollars.
Installment loans are mainly secured, but you may still qualify for an unsecured loan. Opting for a secured installment loan can help you have a higher loan limit at a lower limit. Payday loans are not secured since most of them are repayable from the paycheck that employees receive at the end of the month. Such loans attract higher interest rates and the loan amounts are slightly smaller compared to installment loans.
2. Interest rates and other loan processing fees
Payday loans generally have higher interest rates than installment loans. But the interest rates depend on different lenders and state regulations. In processing monthly installment loans, insurance fees, documentation fees, administrative and penalties apply to incase a debtor default on loan installment repayments. Fees levied on payday loans may be slightly lower because of the shorter repayment period.
3. Loan application process
Consultation before applying for a loan enables you to get all the facts and documents required to qualify for a loan. Different lenders may require various documents such as proof of employment, bank statements, and other loan documents from other creditors to show on time payments over time. But most lenders will ask for a copy of an ID, employer details, payslips, and guarantors in some cases. You should show proof of a source of regular income, a credit score that most lenders check with the credit reference bureau to ensure a high credit score rating. Before loan approval, the loan committee will consider the factors above, and advise on limits and loan approval or decline.
The loan application process for payday loans is typically quicker and easier than the process for installment loans. Payday loans can be obtained from a storefront lender or online, and the application process usually only requires the borrower to provide proof of income, a bank account, and identification. Approval is often given within a few hours.
On the other hand, installment loans may require more documentation and a more thorough application process. The borrower may need to provide additional information about their financial situation, such as proof of assets and liabilities.
4. Terms and conditions of the loan
Most debtors consider the terms and conditions of the loan to determine what type of loan has favorable terms to favor their financial needs. Repayment period, penalties, and means of payment are some of the factors to consider when applying for either a payday loan or installment loan.
Comparing loans based on the above terms can help you to make the right decision. It is advisable to also consider the advantages and disadvantages. Below are the advantages of payday loans and installment loans to consider.
Advantages of payday loans
- Higher loan amounts
- Easy to pay monthly installments
- Fast application and loan approval process
- Helps in better financial management to avoid the debt cycle
Advantages of payday loans
- Credit rating does not affect loan limits
- The easy loan application process
Both types of loans have disadvantages too. The main disadvantage of a payday loan is the small loan limit. Most payday loan debtors also pay higher interest rates and in case of default, the penalties are high. Monthly installment loans may attract an interest rate in some lending companies if a loan is paid earlier than the predetermined period.
Before applying for a loan, research different lenders and review their terms and conditions. Manage your finances better to avoid future financial constraints. Having multiple income streams and better management of your monthly expenditure is the first step to financial freedom. Cutting down on living expenses, budgeting before spending the monthly income, and avoiding impulse buying can also help in achieving financial independence.