About a third of middle-class families are having trouble paying bills because of the coronavirus pandemic. Even before the pandemic, many families were struggling.
They’re turning to credit cards, installment loans, and payday loans to make ends meet. If you’re thinking about these options for yourself, you know that credit cards have high interest rates.
What about an installment loan vs payday loan? How do they compare? It turns out that there are many differences between the two.
Keep reading to discover the difference between a payday loan and an installment loan.
What Is a Payday Loan?
A payday loan is a short-term loan for a low dollar amount. It’s usually between $500 – $1000. Payday loans are meant to bridge a gap when your cash flow is tight.
You can take out a loan, pay necessary bills, and pay the loan back in full on your next payday. If you don’t pay your loan back, you may have to take out another loan and roll over your old loan into your new loan.
When you take out your new loan, you have a new set of loan fees to pay, leaving you with more money you owe to the lender.
The payday loan has a reputation for taking advantage of people who are in dire need of money. Some lenders have charged interest as high as 400%.
This caused many state legislatures to take action and pass regulations as to how much you can borrow and how much a payday lender can charge.
Payday loans can be useful in a tight situation, but you do need to be aware of the pitfalls and make sure you can pay the loan back plus fees on time.
What Is an Installment Loan?
An installment loan is usually for a higher dollar amount. These loans range from $1,000 to hundreds of thousands of dollars. They roll up the interest and principle into one monthly payment.
This installment payment is the same amount each month and you pay it for the life of the loan. Mortgages, auto loans, and personal loans are examples of installment loans.
Installment loans can be used for almost any purpose, even building credit. This guide shows you how installment loans work to build your credit.
Comparing an Installment Loan vs Payday Loan
Which of these loans is right for you? It depends on your financial situation.
Do you need money immediately and only need a few hundred dollars? A payday loan would be a viable option.
If you need more than that and want to have more time to pay it off, then get an installment loan.
Getting the Financial Help You Need
When times are tough, you have to weigh all of your financial options. Looking at the differences between an installment loan vs payday loan is part of the process.
Both can be options to help you in a financial crunch. The one that’s right for you depends on how much you need and when you can pay the loan back in full.
Check out the Financial Toolkit on this site for more ways to get your finances in order.