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When you’re short on cash, you may consider borrowing options in the form of personal loans. Two common types of loans are payday loans and installment loans. While they will both help you access funds quickly, they also have some key differences when it comes to cost, structure, and sustainability. In this article, we’ll look at the main features of each kind of loan so that when the time comes, you can make an informed decision about how to borrow money.
What is an Installment Loan?
An installment loan is paid back over multiple smaller payments, known as installments. Depending on your agreement with the lender, these loans can last anywhere from months to years. Some key features of installment loans include:
- Fixed interest rate
- Regular (usually monthly) payments
- High amounts available
- Long repayment terms
Generally speaking, installment loans are used for large purchases like home appliances or vehicle repairs.
What is a Payday Loan?
A payday loan is a short-term, high-interest loan that’s designed to give you immediate financial relief. Unlike installment loans, they usually stipulate that you must repay the amount in full with your next paycheck. Some typical features of payday loans are:
- Short repayment period (one month or less)
- High interest rates
- Small borrowing amount (as it must be less than your monthly salary)
- Speedy approval process
Payday loans are often the go-to option for last-minute emergencies or unforeseen expenses such as medical bills.
Eligibility
To be eligible for an installment loan, you usually need to have a good credit score. You should also have a reliable and regular income. Many lenders will ask for proof of employment and you will need a proper bank account. You can apply via websites like Loan For Any Purpose and answer questions to determine your eligibility.
On the other hand, payday loans have a far more relaxed approach. Often, all you need is your ID, proof of income, and a bank account. One of the main attractive qualities of payday loans is that lenders may not even require a credit check. This means even if you have a poor credit rating, you may still qualify for a loan.
Pros and Cons
While fixed prices make it easier to budget with an installment loan, the more stringent eligibility criteria and credit checks can off-put some people. And while the lower interest rates look good initially, they add up to a significant amount over time. The sometimes lengthy approval process also means they’re not suitable if you need fast cash.
The clear draw of payday loans is their quick and easy approval process and the fact you don’t need good credit to be eligible. Overall, they’re much more accessible. You can even get cash on the same day which is critical for an emergency financial situation. They do come with some downsides, though. High interest rates can lead to a cycle of debt, short repayment terms increase stress, and consequences can spiral if the loan isn’t paid back on time.
Choosing the Right Loan Type for You
When deciding which type of loan is right for you, take careful consideration of your current financial situation, as well as the key features of the different loan types. Your credit rating, how quickly you need the money, and your preferences for repaying it should influence your decision.
