Comparing Loan Types: Payday vs Installment
The issue of payday loans has become quite controversial over the last decade, due to the many horror stories of debt spirals that have came out, but as you will find out during your research it is never that simple. There is no clear answer such as “this is a good type of loan and this other one is bad”, because every person has their own individual needs.
Because there are very few checks in place before you get your money, it can be easier to get in over your head with a payday loan compared to other types. On the other hand, an installment loan is not always a walk in the park either, as it comes with its own advantages and disadvantages.
Assess Your Situation
First of all, you need to know where you stand in financial terms, and realistically assess your situation. How much money do you really need? How much time will it take you to pay it back? And, more importantly, do you really need to take out a loan in the first place? For example, if you are just hoping to go on a shopping spree or mini vacation, is it going to be worth putting yourself in debt for?
You must always be wary of marketing gimmicks and slick advertisements that promise you quick and easy money in a carefree manner. Neither payday nor installment loans are without risk to you personally, and only you can be the judge of whether these are a good idea for your situation.
Perhaps the easiest legal way to get your hands on some extra cash quickly is a payday loan; these are usually granted for amounts under $1,000 although some providers may offer a little bit more. This is basically an unsecured loan, with no need to put up any kind of collateral, as opposed to most other kinds of finance.
As the name suggests, you are supposed to pay off this loan when you get your next paycheck – generally within two weeks – and hopefully you do not take longer than a month to pay it back. You will need to prove that you are employed at the moment, and show how much you typically earn, but that is basically the main thing most lenders will require of you in the approval process.
If you fail to pay off the loan within one month, you will start to get in to deep water and this is where much of the drama and controversy occurs in the payday loan business. It is very possible to get yourself in to perpetual debt if not handled properly, which is why it is not advisable to take out loans on a whim for things that aren’t all that important.
Pros and Cons:
– As mentioned earlier, it is very easy to get a payday loan in a hurry; you can usually get the money deposited in to your bank account within the same business day, and sometimes as fast as one hour after being approved.
– Your credit history does not come in to the equation, so you will not be denied a loan based on any unfortunate circumstances in your past.
– There is no need for collateral so, theoretically, your home and car will be safe.
– Payday loans are also more confidential than other types of loans; in fact, in the United States it is illegal for your lender to divulge your financial status to anyone.
– Finally, as this is intended as a short term fix to be paid off within weeks instead of months or years, you should be free from obligation much sooner than you would with other forms of finance.
If you need more than $1,000 but less than that of a car or home loan, you should consider an installment loan. This type of loan is generally granted for amounts up to $10,000 although some lenders will offer more. The average duration of an installment loan in the US is about one year so, as you are getting much more money than with a payday loan, you have longer to pay it back.
The process of applying for and eventually receiving the loan is generally more involved and will take more time and busywork before you see the money in your account. You will also be required to undergo a credit check and provide some type of collateral such as a house or car; other forms of collateral include jewellery, high-value electronics and powertools, and even guns.
Pros and Cons:
– Installment loans will get you more money, but with that often comes added risk and a longer-term burden.
– This type of loan is reported to credit bureaus, as opposed to payday loans which are not, which can be a good thing for you if you make regular payments as it will improve your credit scores over time.
– There is usually no penalty or fee involved in paying off the loan ahead of schedule. If for whatever reason you suddenly have more disposable income, you can get out from under the loan at no extra charge.
No matter which type of loan you choose, it is important to read the fine print on any agreements,