According to CNBC, many Americans are one emergency away from unplanned debt. A January 2019 survey indicates that around 60% of American households couldn’t cover an unexpected $1,000 expense without borrowing money. If you’re one of those Americans, you’re definitely not alone. But when it comes to crunch time, it can be stressful to figure out what type of financial solution is right for you.
Payday loans have long been a go-to for those who need immediate cash to handle an emergency. This is especially true for individuals without stellar credit or access to credit cards or other lines of credit. But what’s the difference between payday loans and installment loans, and which one is a better option when you’re faced with emergency financial needs?
Payday Loans vs. Installment Loans: What’s the Difference?
Installment loans are generally loans with terms that vary. The terms are typically over 12 months and may span over several years. You get a lump sum, and you agree to pay a fixed monthly payment including interest over the length of the loan. Mortgages, car loans, and other personal loans are all types of installment loans. These types of loans generally require a credit check and good credit, and possibly a lengthy application process.
Payday loans are technically a type of installment loan as well, but their payment terms are much shorter, the interest rates are higher, and the borrowed amount is generally much smaller. Because the terms are so short—you will often write a check post-dated for your next payday right when you take out the loan—you are expected to pay back a lump sum rather than a regular monthly payment. Payday loans are easy to get and don’t require a credit check, which is one reason why they are so popular.
The way fees and interest are charged on payday loans is also different. Many times, payday loans don’t speak of interest or annual percentage rates at all. Instead, you’re charged a flat fee. That means you might pay $50 in fees on a debt of $300 that you carried for just two weeks. If you convert that fee to APR, it’s a 434% interest. That’s well above the rates for most installment loans.
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Which Is Better: Payday Loan or Installment Loan?
The best type of credit for you depends on a variety of factors, but if you can get an installment loan, you will usually fare better than you would with a payday loan. Even installment loans that are designed for the same last-option use as payday loans tend to have much lower interest rates. OppLoans, for example, offers interest rates no higher than 199%, which is half of what you might deal with in a payday loan situation. If you decide to move forward with either type of loan, make sure you fully understand exactly how much the loan will cost you.
When you’re considering a payday vs. installment loan, make sure you do the math. Calculate the interest of your payday loan option and compare it with the installment loan terms to understand the total cost of the debt. Also, consider whether you might be setting yourself up to fall prey to the payday loan trap. Typically, installment loans offer options that are easier to integrate into your budget than payday loans are, but any loan you decide to take out should be made as a fully informed decision.
Installment Options That Might Be Better Than Payday Loans
Many people turn to payday loans because they don’t think they have other options, especially if their credit isn’t stellar. But that may not be true. Before you commit to any type of loan, take some time to do a bit of research. You may find a number of less expensive options to payday loans.
OppLoans offers personal loans you can use for a variety of purposes, including paying off medical bills, making major purchases or covering security deposits and other expenses required to get you into a new rental. The company offers bad credit loans and reports to the credit bureaus that may help you build your credit. Applying for a loan does not affect your FICO credit score, and you can get loans up to $4,000 with terms as long as 36 months.
Why is it a better option than payday loans? The interest OppLoans charges is much less than typical payday loan rates. Depending on your credit and other factors, the costs can be more than 50% less than you’d experience with payday loans.
The Earnin App
The Earnin App lets you borrow against wages that haven’t paid out yet. You connect it to your bank account, and the money you borrow is taken back by the app on your next pay day. You can borrow between $100 and $500 each pay period, in increments of $100 at a time, depending on how much you make.
Why is it a better option than payday loans? The description above may sound like a payday loan, but the Earnin App doesn’t charge expensive fees that skyrocket the APR for your short-term loan. In fact, it doesn’t mandate any fee at all. You can choose to tip the app for the convenience and service it provides, and tips usually max out around $14.
Second Chance Installment Loans
Second chance loans are products from lenders who are willing to take a chance on people with potentially problematic credit histories. Second chance loans serve two purposes. First, they help you get the money you might need right now. Second, if your timely payments on the loan are reported to the credit bureaus, it could help improve your credit.
Why is it a better option than payday loans? Typically, installment loans have a much lower interest rate than payday loans do. That reduces the cost of your debt. They’re also structured with more affordable monthly payments and don’t assume you can pay the total amount back by your next payday. That helps you avoid the payday loan trap.
Final Takeaways for Payday vs. Installment Loans
Even installment loans with relatively high rates can be less expensive and more flexible than payday loans. But options such as OppLoans do still come with interest rates that can make your debt pricey. These should be used for legitimate emergencies, after you’ve exhausted all of your options, and you should work to pay off the debt as quickly as possible to reduce the total cost.