With all the different types of loans available out there,
it can be hard to differentiate them and to decide which best suits your needs.
Many people who find themselves in need of a bit of extra cash turn to payday
lenders or installment loans but what are the actual differences between these products
and how do you choose the one that’s right for you?
Let’s start with a brief description of what each one loan
entails.
Payday Loans
This type of loan is usually offered by an agency
specializing in payday loans, often having many brick and mortar locations
throughout major cities and offering their services online as well. The
interest and fees for pay day loans are usually quite high and your next pay
check acts as security for the loan itself. The amount borrowed is paid back in
full on your next pay check along with the interest and fees. Over the last
decade, Canada has seen a large increase of payday loans being offered to the
public. The loans can be obtained quickly and easily but will often leave the
borrower short on their next pay day, putting them into what is known as a
payday lending cycle.
Main advantages:
Pay day loans are generally easy to obtain
and the process is not long to complete.
With many physical locations available and
most companies also offering their services online, you can get a payday loan
just about anywhere!
Although expensive, pay day loans can be great
in a pinch if you don’t have any other options. Whereas a bank might have many
requirements that are more difficult to meet, you can most likely obtain a pay
day loan as long as you have a steady job.
Main disadvantages:
As mentioned above, the amount borrowed
needs to be paid in full on your next paycheck. Many people will find
themselves with no choice but to borrow again, putting them into a payday loan
cycle than can be very difficult to break
The fast and easy obtain loans come at a
cost, payday loans are usually the most expensive option out there.
Unfortunately, the payday loan industry is
riddled with fraudulent companies who will attempt to separate you from your
money. When searching for a payday loan, make sure to read reviews and try to
stick to the most well-known loan providers.
Installment loans
As the name implies, these are short term loans that are
paid back in multiple installments over the course of a predetermined amount of
time, usually a few months. The interest rates are relatively high compared to
most banks but are still lower than payday loans in general. These days, most installment
loans are unsecured meaning that you do not need to provide any collateral
(such as a house or a vehicle) in order to secure the loan. You may be able to
find some physical locations that offer this type of loan but generally
speaking, most Installment loan providers offer their services online. Many
other types of loans, such as mortgages or car loans, fall into the installment
loan category.
Main advantages:
Installment loans are not much harder to
obtain than payday loans. In most cases, you can receive your funds on the same
day and the requirements are much more lax than most financial institutions.
The repayment schedule for an instalment
loan is usually set when you obtain the loan. The amount owed is spread out
over the repayment period and the borrower makes fixed payments on each of
their paydays. It’s usually much easier to prepare for these smaller, scheduled
payments as opposed to a payment that can eat up your whole pay check.
Lenders for this type of loan will usually
allow a few months for the repayment. This gives borrowers more time to repay
the loan and makes it easier to avoid a cycle of re-borrowing constantly.
Main disadvantages:
Although the interest rate is not as high
as with payday lenders, it is still general higher than what you would obtain
at the bank. The ease and availability of these loans does not come without a
price.
If you make good on your scheduled payments,
this won’t be an issue at all however, keep mind that most pay day lenders will
charge a fee to your balance if any of the scheduled payments are missed. Although
the extended repayment period and multiple smaller payments are meant to ease
the repayment process, missing these payments could end up making the loan
quite costly.
Comparison
When looking into these options, it’s important to remember
that payday loans and installment loans alike fall into the category of what is
known as alternative lenders. These
loans are obtained at a faster pace and with less requirements than most other
financial institutions and are often sought after by those who cannot turn to
the bank for the loan they require or need funds faster than what can be obtained
at these institutions.
Some consider these loans to both be the same product but as
we’ve seen above, there are some major differences. Here are some more:
- The APR on a payday loans can go up to 400%. The
APR for installment loans usually falls between 30% or 40%.
- Payday loans are repaid within 30 days, usually
on the payday following the day the loan was obtained. The repayment term for
an installment loan, depending on the amount, can range from 3 to 6 months,
sometimes more.
- Payday loans will usually be paid back with a
postdated check whereas the payments for installment loans will generally be
debited automatically from your bank account on the agreed upon dates.
- Payday lenders often offer the option of “rolling
over” your loan once it’s due for an additional fee. Installment loans can be
renewed every few months as long as your loan is in good standing for the standard
fee that is offered.
How to choose?
With this information in hand, you might have already
decided which loan is best for you. Generally speaking, if you feel comfortable
repaying the full amount borrowed in a short period of time and are not in a
position where this will put you into a re-borrowing cycle, payday loans can be
a good option. If you prefer to extend the repayment, especially if you are
looking for a larger amount, installment loans can be easier to manage.
Whichever you choose, the most important thing is to ensure
not to overextend yourself and to choose the option that best suits your
personal needs.