What Is The Difference Between An Instalment Loan & A Payday Loan?

Jane Wardle

Written by Jane Wardle on January 7, 2019

Updated May 10, 2019

Confused about payday loans

When you need to borrow some money, it can be difficult to know which type of financial product is right for you. There are loads of different lending options available, from mortgages and car finance to credit cards and payday loans and knowing which is right for you can be confusing.

A lot of loans fall under the category of instalment loans, as they are paid back in monthly instalments. This is different to some other loans that might be paid back in one lump sum, such as a payday loan. There are some key differences between payday loans and instalment loans, and when you are considering which choice is right for you, it is vital to understand how they work and the pros and cons of each.

This guide covers the difference between an instalment loan and a payday loan, as well as some useful tips to help you decide which is best for you.

What is a payday loan?

payday lenders

A payday loan is a form of short-term finance that is offered by specialist lenders. They can usually be applied for online and funds are released in a matter of minutes if you are approved. You can usually borrow between £50 and £1,000 and will have to repay the entire loan in full on your next payday, plus interest and fees.

Payday loans have a high APR compared with other forms of borrowing and are often easy to obtain as they will consider applications from individuals with poor credit.

Payday loans can be dangerous if you struggle to repay the amount in full on time, or if you rely on borrowing month after month. It can be easy to find yourself in a risky debt cycle.

What is an instalment loan?

Instalment loans are short-term loans that are often unsecured. They usually have relatively high-interest rates, but not as high as with a payday loan, and instead of being paid back in one lump sum, the repayments are spread out over 6 or 12 months for example. You will repay the loan amount over an agreed amount of time and will pay a fixed amount every month until the loan plus interest has been repaid.

The majority of everyday loans are categorised as instalment loans, such as mortgages, personal loans or car loans. With instalment loans, you can borrow larger amounts than with a payday loan and pay them back over a more extended period of time.

Installment loans are a solution if you find yourself with large unexpected expenses as you can borrow larger amounts of money with more flexible repayment terms. Many short term lenders offer installment plans with 3 month loans & 6 month loans.

What are the advantages of a payday loan?

  • Quick cash: You can receive the funds into your bank account in a matter of minutes of your loan application being approved.
  • Easy approval: You don’t need to have a good credit score to be approved for a payday loan, usually if you have a stable job and income then you will be approved.
  • Convenient: As payday loans can be applied for online very quickly, they are very convenient when you are in need of some cash quickly.

As payday loans are so easy to obtain, they can often be the only option if you have poor credit and can’t use any other finance solutions

What are the disadvantages of a payday loan?

  • Expensive: The APR on a payday loan is often very high compared with all other forms of lending.
  • Risky: When you start using payday loans it can be easy to get yourself into a debt cycle and missing a repayment can result in some hefty additional charges.
  • Scams: With the growth of online payday loan lenders, there has also been a growth in scam lenders. It is important to check the company you are using is legitimate.

You can check if a payday loan lender is legitimate by checking if they are regulated by the Financial Conduct Authority (FCA).

What are the advantages of instalment loans?

  • Regular payments: Installment loan have regular monthly payments that will be the same every single month, so you can easily plan your finances around the repayments.
  • Long term: As you are paying the loan of monthly, they come with a longer term than payday loans.
  • Borrow more: Installment loans often let you borrow larger amounts of money than a payday loan, as you are not expected to pay it all back with one pay check.

With instalment loans, you can often borrow anywhere between £1,000 and £100,000 depending on your eligibility, the loan type and the lender.

What are the disadvantages of instalment loans?

  • Longer application: while instalment loans are often quite quick and easy to obtain, the money is usually released to your bank in a matter of days instead of minutes.
  • Expensive: Although instalment loans will charge lower interest than a payday loan, they still often have quite high APRs. As you are paying it off over a longer time period, the interest can add up to be more than if you have chosen a payday loan.
  • Secured: Some instalment loans for large amounts might need to be secured by your personal property, which can put your assets at risk of repossession if you don’t make payments on time.

Installment loans are often more difficult to obtain than a payday loan, and if you have bad credit you might not be approved.

Comments are closed.

Related Products

£50 Payday Loans From Direct Lenders With Bad Credit

If you only need a small loan such as £50 repaid over a short period then our direct payday lenders can help. Payday and short term bad credit loans are available with quick online applications and often sameday application decisions.


Instant £100 Payday Loans From Direct Lenders

If you need to borrow cash for the short term until payday then our selection of £100 loan lenders below can help. Please be aware that Payday loans are only compariable against unauthorised overdraft charges. Please consider other options and on [...]

1 & 3 Month Loans From A Direct Lender

We’ve selected from our panel of lenders those that allow 1 – 3 month loan periods. These are short term cash lenders who can provide funds to your acccount instantly on the same day. Compare the 1 & 3 month direct lenders and apply direct via [...]

Related guides

What Is An Early Redemption Penalty or Charge?

Early Repayment Penalty also refers to Early Repayment Charge (ERC) and indicates a fee you might be required by a lender in case you paid off your mortgage or loan prior to the credit facility’s scheduled term. A redemption penalty is usually equal to one […]

Can You Still Get A Loan With CCJ’s, Defaults Or Missed Payments?

According to figures released by the Office for Budget Responsibility in March 2018, the average household’s debt-to-income ratio has been steadily increasing over the past few years and is set to reach 146% by 2023. Unfortunately, this means the number of people missing payments, defaulting […]

Can You Get A Bad Credit Loan Without Using A Guarantor?

Last year, one in five people were turned down for a personal loan or credit card. Over 40% of these were rejected because of poor credit. If you were one of those people, and need to take out a loan, you might think your only […]

Lending Expert is a credit broker and comparison website, we're not a lender.

We bring together the very best financial providers and products from across the market place.

Warning: Late repayment can cause you serious money problems.
For help, go to moneyadviceservice.org.uk