Payday loans vs Installment loans


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:

  • Fast and easy

Pay day loans are generally easy to obtain and the process is not long to complete.

  • Convenient

With many physical locations available and most companies also offering their services online, you can get a payday loan just about anywhere!

  • Leniant

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:

  • Can become cyclical

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

  • Most expensive option

The fast and easy obtain loans come at a cost, payday loans are usually the most expensive option out there.

  • Scams

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:

  • Fast and easy

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.

  • Easy to plan

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.

  • Extended term

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:

  • High Interest

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.

  • Penalties

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.


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.

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