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.
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.