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difference between payday and installment loans

Payday Loans vs. Installment Loans: Which One To Choose

Updated on November 24, 2022


When you're in an emergency financial situation and have less than perfect credit, you might turn to either payday loans, which are generally required to be repaid in a lump sum, or installment loans, which are spread over a more extended period. And even if you have no time to look for different instant loans for bad credit and how they work, it is advisable to learn the distinctions between payday and installment loans to help you pick the right loan for your financial situation.

If you need help comparing the features and benefits of both payday and installment loans, we're here to help you out.

What Is A Payday Loan?

Instant, flexible, and convenient are some of the words that lenders often use to describe payday loans, and this claim does hold water to a great extent. A payday loan is nothing but a short-term lending option for those who need quick cash until their next payday. This is why payday loans have short repayment terms and, in most cases, are meant to be paid off in full by your next paycheck.

Payday loans are usually used during cash emergencies like paying an unexpected bill or rent when your paycheck isn't enough. These loans are easily accessible as they do not require credit checks. However, the main reason why borrowers might resist opting for a payday loan is that they notoriously have high-interest rates.

payday vs installment Loan

What Is An Installment Loan?

Installment loans generally need no introduction - they are one of the most popular forms of credit. When you opt for an installment loan, you agree to borrow a lump sum of money and repay the principal with interest over time. It makes perfect sense to use an installment loan to finance your big purchases like a home or vehicle.

Since you know how much you owe upfront in case of installment loans, it can help you create your monthly budget and plan your spending accordingly. Usually, secured installment loans have lower interest rates than unsecured loans and no prepayment penalties. A few examples of installment loans include car title loans, student loans, personal loans, auto loans, and mortgages.

Installment Loan vs Payday Loan

What's The Difference Between Payday Loans And Installment Loans?

Although payday loans and installment loans can prove to be helpful when you need cash immediately, there are some noticeable differences between the two based on a variety of factors like:

Differentiating Factors

Payday Loans

Installment Loans

Purpose of borrowing You can use a payday loan to cover your short-term cash needs in between paychecks. These loans can be used for both short-term and long-term cash needs.
Interest Rates Payday loan lenders usually charge triple-digit annual percentage rates (APR). This depends greatly on the state you reside in. In most cases, installment loans come with lower interest rates than payday loans.
Use of Collateral Being unsecured in nature, you won’t require any collateral to be approved for a payday loan. An installment loan can either be secured with collateral or unsecured where you don’t need any collateral.
Loan Amounts Payday loans allow you to borrow a small amount of money, typically less than $1,000, to help you promptly take care of emergency expenses. An installment loan can help you borrow more money than a payday loan. Their loan amount ranges from $100 to $10,000 depending on your eligibility, state of residence, and lender.
Loan Terms These loans have a short tenure of 10 to 31 days. If you borrow a payday loan, you might have to repay it once you get your next paycheck. Installment loans provide you several months or even years to repay your loan with fixed monthly payments or installments, depending on your loan provider.
Credit Check A payday loan lender won’t check your credit report, making them super easy to access. An installment loan lender can run a soft credit check which doesn’t hurt your score to check your creditworthiness.

How To Choose The Right Loan For You?

Selecting the right loan for yourself can be tricky. But if you know what type of loan you need, secured or unsecured, and whether you have the ability to repay, things could get a little easier.

Your credit score could also help you decide which loan to choose between installment and payday. It's generally believed that a payday loan is a better option if you have a low or no credit score. Fortunately, some lenders provide bad credit installment loans too.

In addition, if you're looking for improvement in your credit, it's important to note that payday lenders typically do not report your on-time payments to credit unions. However, they do report if you fail to make payments. On the other hand, installment loans can offer you the opportunity to build credit if you make on-time payments over time.

Your loan requirement is also crucial. You can get more cash and even more time to repay with installment loans than payday loans. Also, the high APRs attached to payday loans make them more expensive and comparatively hard to pay back.

Having all that said, choosing between installment and payday loans perhaps depends on your financial situation and how you want to manage it.

What To Expect From CASH 1's Installment Loans?

CASH 1 offers secured and unsecured installment loan options to help you get the cash you need quickly. With our online installment loan, you stand a chance to borrow funds even with a bad credit score.

If you decide to get an installment loan, you can enjoy the benefit of our flexible repayment plans that can help you lower payments by spreading them out over more extended periods. Prepayment penalties are also not a problem if you repay the loan in full before time.

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Harita Solanki

Harita Solanki is a passionate advocate for personal finance and believes in empowering individuals to take control of their financial lives.

Her expertise covers a wide range of personal finance topics, including budgeting, saving, credit, debt management, and retirement planning.

With over six years of dedicated experience in the finance industry, Harita has helped countless readers of CASH 1 Loans make informed decisions and achieve their financial goals.

As a dedicated writer, Harita has contributed to numerous financial publications, sharing her knowledge and insights to help readers navigate the complexities of personal finance.

Her writing style is approachable, concise, and tailored to the needs of everyday individuals looking to improve their financial well-being.