The difference between a payday loan and installment loan is very important to understand. Each loan has unique requirements, advantages, and disadvantages that can either benefit you or cost you more than you should pay.
Of course, these financial products can also vary greatly between lenders. Do your due diligence before you make a decision.
What Are Payday Loans?
Payday loans are short-term financial products meant for urgent needs. They are sometimes called cash advance or check advance loans.
Some states do not allow payday lending. Others allow it, but the lender must have a license and follow specific laws and regulations. Payday loan lenders can be found in-person and online.
The maximum amount available to the borrower depends on your state, income, and the particular lender’s limits. As an example, the legal maximum amount for a payday loan in Missouri is $500. Every payday loan lender must have a license.
Even so, applying for a payday loan does not mean that the applicant will automatically qualify for the maximum amount. If this is the first time using the lender, they may offer the applicant less.
Qualification Requirements For Payday Loans
As mentioned, financial products can vary greatly between lenders. Nonetheless, payday loans are generally less involved than other types of loans and available to most borrowers.
Basic qualification requirements for a payday loan are often:
- Banking information OR a postdated check so the lender can collect loan funds on the due date of the loan
- Steady income paid by direct deposit so that it is easily verified electronically OR proof of income such as recent pay stubs
- Identification such as a Social Security number (SSN) or taxpayer identification number (TIN) that confirms you are at the age of majority in your state.
Payday Loan Advantages
The most obvious advantage of payday loans is that almost anyone can get one. Payday loan lenders are everywhere and if you earn a steady income, you’ll probably qualify.
Some lenders accept multiple forms of income too. Consequently, if you earn your money through contract work, self-employment, pensions, or government support you can probably find a payday loan somewhere.
Additionally, payday loans are usually very fast. Whether you walk into a storefront or apply online, you may be able to get cash within hours if you choose the right lender.
Payday Loan Disadvantages
One major disadvantage when comparing a payday loan vs installment loan can be your cost to borrow. Payday loans tend to have a very high Annual Percentage Rate (APR). Furthermore, unlicensed lenders do exist and they may charge hidden fees that can increase how much your loan costs you overall.
Additionally, payday loans have a very short repayment term. That usually means you must repay your loan within weeks. If you borrowed to handle an unexpected expense, this short term may not give you enough time to get your finances back on track. As a result, you may need to borrow repeatedly.
Finally, payday loans aren’t usually reported to the credit reporting agencies, so even if you repay yours as agreed it won’t boost your credit. However, non-payment of a payday loan could potentially negatively affect your credit.
For instance, your hours were cut back at work and the lender tries to withdraw the loan amount on payday. The money’s not there so they charge you an NSF fee. When you explain that you cannot pay, they send your debt to collections. The collection agency adds the debt to your credit report.
What Are Installment Loans?
Installment loans offer a lump sum of money that you pay back over time through payments (installments). They tend to have a fixed interest rate throughout the loan term. Mortgages and auto loans are variations of installment loans designed for specific purposes.
In this case, we’re discussing personal installment loans that can be used for almost any other purpose. This includes borrowing to buy a new television, fund a wedding, fix your car, and much more. If you need to know more about the terms used when discussing loans, we suggest you use this personal loan glossary.
Installment loans are available from banks, credit unions, private lenders, and online lenders. Installment loans generally provide more money than a payday loan, but some lenders also offer small amounts for your convenience.
Qualification Requirements for Installment Loans
The qualification requirements for an installment loan vs payday loan may or may not differ, depending on your choice of lender. Some have very strict requirements, while getting an installment loan with bad credit can be quite easy through certain lenders.
The following are some of the factors a lender may consider when reviewing your installment loan application:
Credit Score
Many lenders put a heavy emphasis on your credit score and consider 670 the minimum. If your credit score is below this, they may automatically refuse you for an installment loan.
Fortunately, not all lenders set a minimum credit score requirement. However, you may pay more for an installment loan if you have less than pristine credit.
Income
It’s understandable that lenders want to know you have the income to repay your loan. Consequently, they will check that you have a stable source of income.
Some ask you to provide written documentation such as W-2 forms, bank statements, or pay stubs to verify your income. Others use electronic income verification through authorized bank statements.
However, many lenders also set a minimum income amount. As a result, if you earn a modest income as a student, pensioner, or new employee, you may not qualify. Luckily, some lenders offer low income installment loans to satisfy the needs of most people.
Funds Usage
We mentioned that you can find installment loans for almost any purpose if you look hard enough. However, many lenders only offer installment loans for specific purposes to limit their risk.
Consequently, you may not be able to borrow for certain uses. For instance, some lenders will not issue loans for educational purposes. Others may not grant a loan if you want the money as seed money for a small business either.
Fortunately, you can get a cash advance loan online for most purposes through particular lenders, providing you meet their qualification requirements.
Installment Loan Advantages
When comparing payday loans vs installment loans, installment loans offer several distinct advantages:
- More time to repay your loan, which lowers your payments making them more affordable.
- Timely payments on an installment loan are reported to at least one of the credit reporting agencies. This may help boost your credit score and make more credit products available to you.
- Interest rate and payments remain fixed throughout the loan term. Consequently, it is much easier to work the amount into your budget.
- Easier to get than they were in the past. Lending options have expanded and you can probably find an installment loan that suits your needs. That applies whether you have poor credit, a short credit history, or earn your money in other ways than regular employment.
Installment Loan Disadvantages
One major difference between a payday loan and an installment loan is your time commitment. Payday loans are repaid quickly, so they’re only a short-term obligation. When payday rolls around the lender collects a one-time full payment and your loan is finished.
However, an installment loan may take months or years to repay. Yes, this makes it easier to pay your payments, but it also means it takes longer to get out of debt. Additionally, your interest rate on your loan remains fixed throughout the term. If interest rates drop, you still pay at your established interest rate.
Finally, the payments on an installment loan are reported to the credit reporting agencies. If you are late or miss payments, it will appear on your credit report. Defaulting on an installment loan can impact your credit for years and make it very hard to obtain additional credit.
Summary of Differences Between a Payday Loan and Installment Loan
For the sake of comparison, we’ve compiled a brief table so you can quickly assess which loan type might be right for you. However, before you jump to conclusions please remember that loans can vary greatly between lenders.
| Payday Loan | Installment Loan | |
| Available Amount | Between $100 and $1,500, depending on the state | Between $200 and $15,000, depending on the lender |
| Availability | In-person or online | In-person or online |
| Loan Term | Between 14 and 31 days, depending on state | Between 6 months and 144 months, depending on the lender |
| Interest Rate | Fixed and determined by lender | Fixed and determined by lender |
| Credit Score Requirement | None | Depends on the lender |
| Income Requirement | Minimal | Depends on the lender |
| Income Source | Most accepted | Depends on the lender |
| Application Process | Easy | Depends on the lender |
| Funds Release | Fast | Depends on the lender |
| Impact on Credit Score | Payment not reported to credit reporting agencies | Timely payments may improve credit score |
| Usage | Any | Depends on lender |
As you can see, your choice of lender is very important if you’re interested in an installment loan. Overall, this type of loan offers longer terms and larger loan amounts. However, the loan process, speed, and loan requirements rest entirely with the lender.
Some lenders accept bad credit and non-employment income, while others have strict credit score and income requirements. Some only deal with you in-person, while others embrace online lending.
Additionally, lenders may only grant loans in particular states. For instance, if you’re looking for Missouri installment loans online this lender meets state licensing requirements.
Choosing Between a Payday Loan and Installment Loan
The differences between a payday loan and installment loan make them unique and suitable for specific needs.
Generally, a payday loan is best used as a last resort, because of its short repayment term. You must repay your loan in-full on your next payday, which may worsen your financial position instead of helping you.
Additionally, a payday loan may not offer you enough money. The cap on these loans in many states is only $500 and you may get less, depending on your net income.
While a payday loan may seem a faster, easier option, that’s not necessarily the case. As an example, FlexMoney offers Missouri personal loans of up to $2,000, with 12 months to repay. All we ask for is proof of your steady source of recurring income and an active account with an American bank or credit union. You may be able to get your funds as early as today.
Before you make a decision, check out the details of the loans you’re considering carefully. The loan should meet your needs and offer convenience and speed as well as options that fit your budget. Since installment loans offer more time and more options, they are often a better choice.