When people are thrown into an unexpected life event like a car accident, hospitalization, or essential appliance repair they can end up in cash crux. They have little savings, which can make it hard to overcome the wrench thrown suddenly. Loans are the financial solution people experiencing financial troubles can think about.
There are options from financial institutions, banks, and direct lenders. There is a short-term loan like installment loans and the payday loan option. Both are good alternatives to receive the necessary cash for emergency purposes. On LoanPig, you can apply for short-term money loans to fund your –
- Home repair
- Emergency medical expenses
- Start-up business
- School costs
- Consolidate other debts
Installment loan versus Payday loan
The difference between an installment loan and a payday loan will help to determine, which short-term loan is better to handle your financial issue better.
Secured or unsecured
Secured is the one where the borrower has to offer collateral or guarantee, while in an unsecured loan there is no need for collateral to obtain the loan amount. Pledging collateral means the risk is reduced and so secured loans have a lower rate of interest.
Installment loans are available as secured and unsecured. Offering collateral of not can impact the loan amount as well as its interest rate. It means with collateral you receive a high amount with low interest and vice versa.
Alternatively, payday loans are unsecured and categorized as high-cost short-term loans. The loan amounts are usually low but interest rates are significant.
The amount for installment loans is evaluated on repayment affordability. Affordability is determined through the borrower’s submitted documents like valid ID, National Insurance Number, pay slip, collateral documents if applying for secured loans] and billing statement.
In payday loans, the borrower gets a small cash amount that needs to be repaid completely on the next payday. It is unsecured, so has significantly high-interest rates.
With an installment loan, borrowers can make a small payment every month as scheduled or if possible pay off the entire amount and get a rebate for the unused interest portion.
Repayment terms are the key difference between installment and payday loans. Installment loans are repaid every month across fixed time duration. The loan can be repaid within two to twelve months. If the payoff is sooner there is no fine, but you can get a rebate on a part of your interest.
For a payday loan, the repayment is automatically on the next salary payout. If you miss repaying the entire loan then you will be charged interest and fees.
The same amount will be needed to pay on the next monthly pay slip. It is hard to pay the entire principal, interest, and fees on a payday loan.
A credit check is compulsory for any kind of loan. Nevertheless, payday lenders ignore credit checks, which is advantageous to borrowers with bad credit scores. It even means that even if you pay the loan on time you don’t receive credit benefits like a credit score increase or re-establish credit.
The lenders will file judgment if you failed to make a payday loan repayment, which can damage your credit.
Which is better – Installment loan or Payday loan?
The answer to this question depends on your financial needs urgency, amount, and affordability.