Considering getting a payday loan? There are a few things that you should know before taking the plunge. Payday loans are short-term loans with high interest. People often use them as a quick fix to cover any expenses between paychecks.
Make sure you inform yourself about payment loans before you actually get one. Here’s the first question you’ll want to answer—is a payday loan an installment or revolving loan? The good news is, you’re not in this alone! We’re here to give you the answers you want.
Is a Payday Loan an Installment Loan?
No, a payday loan is not an installment loan. That’s because payday loans are typically paid back in a single lump sum when you get paid again. In some cases, the payday loan might be divided into two payments over two paychecks. Payments typically come directly out of your checking account.
Is a Payday Loan a Revolving Line of Credit?
No, payday loans are not revolving lines of credit. An example of revolving credit is a credit card. Your credit card has a credit limit that you use, pay back and continue to use.
For example, you might have a card with a $1,000 credit limit. You spend $200, so now you have $800 in credit left. But if you pay off that $200 in your next statement cycle, you have $1,000 worth of open credit again. It revolves as you take it out and pay it back, which is where this type of credit gets its name.
Some people do fall into what’s called the payday loan trap. That means that they can’t pay back the loan when payday comes, so they roll it over. Essentially, they just continue to take the loan out again with additional fees each time and often end up feeling like they can’t escape. But this isn’t revolving credit.
What’s an Installment Loan?
An installment loan is funding that you agree to pay back via fixed monthly payments over a certain amount of time. How much you pay in total depends on how much you borrow and your interest rate. For example, if you borrow $10,000 for a five-year period at a 6% interest rate, you would pay $193.33 a month for 60 months. Some common types of installment loans include unsecured personal loans, automobile loans and mortgages.
Which Is Better: Payday or Installment Loan?
Typically, payday loans are small, short-term loans meant to cover emergency expenses until your next payday. But they have high interest rates and can be difficult to pay back as planned. That’s when you’ll fall into that tricky payday loan trap.
Installment loans, on the other hand, often come with lower interest rates. They also let you pay back the amount you borrowed over a longer period of time—from months to a few years. That means you can make potentially smaller payments that are easier to fit into your budget.
How to Get an Installment Loan
Because your credit score plays a huge part in your loan application, it’s important to keep an eye on it before you apply for an installment loan. Use our free credit report card to get your free credit snapshot, plus information on the five critical areas that impact your score. Once you take a look at your credit score, you can have a better idea of which loans you could qualify for, or what you areas of your credit you want to work on before applying for a loan.
Next, research the personal loan options available to you. Start with your local bank or credit union, especially if you already have an established relationship with a potential lender. You can find a number of qualified lenders on Credit.com and compare them easily online.
If you find a potential installment loan online, you can apply for it. Be prepared with at least the following information:
- Driver’s license and/or social security number
- Check or savings account information
- Information on your income and expenses
Lenders may also want to know what you plan to do with the funds from the loan. Online personal loan applications are usually processed quickly. You might get an answer within minutes.
Alternatives to Payday Loans
It’s understandable why many people turn to payday loans. In times of crisis, it can be difficult to know where to get the money to cover a necessary expense. But payday loans are, at best, short-term solutions to only part of the problem. And in some cases, a partial short-term solution can actually make the issue worse.
For example, if you’re struggling financially during the COVID-19 pandemic, a payday loan isn’t a great option. You might be struggling in part because your pay or hours were reduced. Taking out a loan against your next paycheck just moves the problem from today to your next payday.
You might consider alternative options including installment loans. Here are just three ways to finance a necessary expense without putting your next paycheck up for ransom.
- OppLoans: This company was established specifically to offer a service alternative to payday loans. It offers installment loans up to $4,000 at lower interest than payday loans. It also doesn’t base loan approval on your credit score. Instead, Opploans looks at your employment and income and expense history. While their interest rate is significantly lower than your typical payday loan, it’s still on the high side.
- Earnin App: This is a smartphone app that lets traditionally employed people and on-demand workers borrow up to $100 at a time up to $500 against incoming pay. Ultimately, it lets you access funds from your paycheck early. But it doesn’t charge a huge interest rate or even a big fee for the service.
- Credit cards: While you do have to manage credit cards wisely to keep from creating a debt problem with them, they’re more flexible than payday loans. And if you pay off your balances regularly and manage your account responsibly, it’s probably a less expensive option than payday loans can be.
Payday Loans Can Be Useful—But Be Careful
If you find yourself in a serious pinch, payday loans can come in handy. But only use them if you have a guaranteed way to pay them back as soon as possible. A missed payment can result in another and another and another, until you find yourself stuck in that payday loan trap.
Remember—there are payday loan alternatives out there with significantly lower interest. So before you get that payday loan, make sure you look at all your options first.