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?
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.