Understanding Important Distinctions Between Payday Loans and Installment Loans

By | July 23, 2018

Payday loans are helpful in emergency financial situations, but they are very short-term lending products. The borrower must pay the entire amount back with interest by his or her next pay date. This can be tough when someone is already struggling financially. Borrowers commonly roll the loans over as often as allowed by law or by the lender, incurring more interest charges. Installment loans from companies like Maxlend Loans sometimes are better solutions.

Longer Repayment Period

Installment loans have a longer time for repayment of the principal. The loan might last for six, nine or 12 months, for example. Some companies set up monthly payment arrangements and others twice-monthly. Sometimes that decision depends on how often the borrower is paid by the employer.

A payday loan might be chosen if the borrower is certain it can be paid back on time. Otherwise, an installment loan with smaller payment amounts is probably a better choice.

Differences in Interest Rates

The interest rates on both of these lending products tend to be somewhat higher than bank loans and credit cards, with the rates on installment loans generally being lower than those on payday loans. Nevertheless, these borrowing opportunities are useful for people with bad credit or no credit history when those individuals get into a tight spot. They may not be able to borrow money from a friend or relative for an emergency car repair, for example. Without a functional car, they may not be able to get to work.

Refinancing and Extensions

Some installment loans can be refinanced if the person needs to take some cash out a few weeks or months later, or extend the number of payments while making the payment amount smaller. This costs more money so the decision should not be taken lightly.

Considerations

Interest rates are higher on payday and installment loans because the default rate is significantly higher. The lending companies are taking a chance on borrowers who have had credit problems previously or no established credit. It’s best for borrowers to pay these loans off as quickly as possible and work to establish a good credit score.