Online installment loans can be an excellent choice when you need money for additional expenses. They allow you to borrow for things such as fall school activities, upcoming holiday expenses, and even heating bills, quickly and easily.
Still, borrowers have many financing options available to them, so it is important to understand the benefits and drawbacks of each, since they differ a lot. For instance, both online installment loans and payday loans offer very fast money, but what they cost you and how they work are completely different.
Let’s compare the two to discover which is your best option if you need to borrow money this fall.
Payday Loans
Payday loans are very short-term loans. You can get them online at any time and in-person in many locations.
Advantages
Easy to Obtain
If you have a job or another source of direct deposit income, you can probably get a payday loan. Many do not require a credit check or collateral, since repayment is tied to when your income.
Fast Money
Payday loans are popular, because they are usually very fast. You may have to stand in line if you apply in-person, but you can usually get money within a day and sometimes within hours. The lender provides a lump sum amount either as cash, a check, prepaid debit card, or straight into your bank account via electronic deposit.
Disadvantages
Fast Repayment
Your payday loan is repaid on your next payday cycle, which is within a matter of weeks, not months or years. Typically, you must give the lender a postdated check for the loan amount, plus interest and fees to ensure you pay.
Alternatively, you grant the lender access to your bank account and they automatically withdraw what you owe on your payday.
Low Maximum Amount
While the convenience of payday loans may sound great, remember that you probably won’t be able to borrow a lot of money. The maximum is normally around $500.
Even so, these loans are illegal in many states, due to the financial problems they have caused many people. There are also restrictions in many states where they are still allowed, for the same reason.
Easy to Get Into Debt Cycle
One of the main problems with payday loans is that they aren’t tied to your financial situation. This can be a disadvantage since many people are already in financial trouble when they apply for one. Later, paying the payday loan back can make it near impossible to meet necessary expenses, so the borrower defaults on their loan. This leads to even more problems.
No Positive Credit Score Impact
While the lender may not do a credit check before they give you a payday loan, they will almost certainly report any defaults to the credit reporting agencies. It can take up to seven years to get this information off your credit reports.
Additionally, your credit score will suffer making it harder to get credit. Since you need credit for almost everything nowadays, that’s a serious consideration. Plus, if you can’t meet your repayment obligations, you’re charged steep additional fees which adds to your money problems.
Some lenders allow you to roll over your balance into a new payday loan. Still, you should think about this. If you couldn’t pay the original loan, will you be able to repay a new loan with a higher balance? Probably not.
Very High Interest Rates
Payday loans have extremely high interest rates. Depending on the state, they range between 652% in Idaho to 114% in Colorado. That makes the average around 400%, according to the Consumer Financial Protection Bureau. Clearly, that’s a lot of money to pay for a very small loan and these interest rates are some of the highest of all financial products.
Additional Fees
Depending on the lender and state, payday loan fees can include finance charges ranging between $10 to $30 for every $100 borrowed, renewal or rollover fees if you can and want to extend your payday loan, extended repayment fees (when permitted), late fees, NSF fees, and prepaid debit card fees.
Installment Loans
Installment loans differ greatly from payday loans. Here are there advantages and disadvantages so you can compare the two.
Advantages
Easy to Obtain
The days of waiting days or weeks to find out whether you qualify for an installment loan are long gone. Today, potential borrowers can apply for online installment loans in the U.S. and get an answer within minutes. There’s no taking time out of your busy day to visit a lender. Apply anytime from any device, at your convenience.
Fast Money
Once pre-approved, the lender sends you your loan documents. You review them and sign them electronically. Once received, the lender releases funds to you very quickly. In some cases this is within hours, but usually within a day or two.
Flexible Options & Repayment
Online installment loans provide repayment flexibility. You choose how long you want to take to repay what you borrow, which makes budgeting for seasonal costs much easier. You have predictable payments and peace of mind knowing you can afford the loan and you know when you’ll pay off your debt.
Lenders often provide terms as short as six months to as long as many years. The longer the term, the lower your payments with more interest paid over time.
High Maximum Amounts Available
Online installment loans can range between a few hundred dollars to tens of thousands, or more. What’s available to you depends on your financial and personal situation, as well as your credit.
Pre-Qualification Ensures Affordability
When you apply for an online installment loan, the lender asks you for basic personal and financial information to assess your eligibility. If the information provided meets their requirements, they will tell you know you are “pre-qualified” or “pre-approved” straightaway.
While this does not mean you automatically get the loan, it does show that your odds are very high. The lender will also show you what they have to offer so you can compare this loan with others, if you want.
The best thing about this process is that it does not affect your credit, but you get a good idea of what is available to you. There’s no obligation either.
If you do not pre-qualify, it can mean several things:
- You don’t meet the lender’s requirements – there are lenders for almost anybody – find an appropriate lender if you have a bad credit score, no credit history, or an alternative income source.
- You’re trying to borrow more than you can afford – check your debt-to-income ratio. Most lenders want to see a DTI of 36%, or less.
- There are problems on your credit reports – always check your reports and fix any problems before you apply. You can get all three reports for free here.
- You did not complete or made a mistake on your application – always complete all sections and check your application before you submit it.
May Improve Credit Score
Online installment loans are reported to the credit reporting agencies. This means they may improve your credit score in several ways.
First, your credit history accounts for about 35% of your credit score. Your timely payments are a positive factor that creditors look for.
Second, if this is your first loan, it will increase your credit mix. This accounts for about 15% of your credit score and shows lenders you handle various forms of credit well.
Third, long-term loans can also increase the age of your credit history. Lenders consider this since it shows you handle credit well over time.
Lower Interest Rates
The average consumer interest rate on an online installment loan is currently 7.51%. Of course, that doesn’t mean you automatically get that rate. Interest rates depend on the lender, your state’s laws, and your personal situation.
Still, the interest rates on online installment loans are far lower than payday loans. Your rate and your payment remain fixed throughout the loan term, so there’s no guess work involved.
If you’re worried about getting an online installment loan with a credit score below 580, some lenders offer loans specifically for you.
Fewer Fees
Generally, online installment loans involve few, if any, fees. Some lenders impose a origination fee for setting up your account, but many do not. Others levy a prepayment penalty if you want to pay more than your scheduled payments, but others offer “open” loans without this charge. Do your homework.
Highly Transparent
Online installment loan lenders depend on their reputation for repeat and new customers. Consequently, good ones are very transparent about their processes, expectations, and responsibilities. They employ legal, safe lending practices and want you to succeed.
If you need more information about how online installment loans work in the U.S., the lender should provide clear explanations on their website. They should also provide contact information so you can speak person-to-person, if you prefer.
FlexMoney Offers Options for Online Installment Loans
If you can’t decide between short-term vs long-term borrowing, FlexMoney offers an easy online portal to many lending solutions so you can see what’s best for you. We’re a transparent, responsible lender that makes it easy to make informed financial decisions.
If you’re borrowing in the U.S. this fall, explore your options hassle-free. Complete one application form and you’ll tap into our extensive network of reputable lenders offering online personal loans between $200 and $35,000. Compare interest rates and terms within minutes and get the money you need quickly.