Whenever an unexpected financial crisis pops up, not many people have the money on hand to make ends meet. It could be a sudden car accident, an unexpected hospital visit, or even an important utility bill that you can’t afford to pay.
Without sufficient savings, it can be difficult to make ends meet, which is where payday loans and installment loans can be useful. However, not everyone knows the difference or whether one is better than the other.
So, before you obtain online guaranteed payday loans from CocoLoan, here’s an in-depth breakdown of the two lines of credit, which should help you decide between the two more easily.
What Are Installment Loans?
An installment loan can typically cover a wide range of loans, such as car loans, mortgages, boat loans, etc. However, as compared to payday loans, the most frequent types of installment loans are commonly referred to as “personal loans.” When it comes to these loans, you will essentially be provided with a lump sum upfront and be required to make monthly repayments for the entire life of the loan.
The set period will usually vary depending on the type of loan that you applied for. For instance, a mortgage could be paid off in 30 years, a car loan in 3 years, and a personal installment loan in 12 months. Installment loans can also be secured or unsecured, so while some loans will require you to put up collateral, others don’t.
It is also important to note that any personal installment loan will usually require you to have a good credit score, which makes them less accessible than payday loans. However, if you navigate to this page to get payday loans, you will also realize that installment loans tend to come with significantly more favorable rates and terms.
What Are Payday Loans?
Unlike installment loans, payday loans come with smaller loan limits that tend to be less than $1,000 on average. They also have shorter repayment periods, as these loans are usually meant to act as cash advances until your next paycheck arrives (hence the name).
In most cases, they are often due within 2-4 weeks of disbursement, and most payday lenders will typically demand that you grant access to your bank account so that the lender can withdraw the funds on your next payday.
Unlike installment loans, your credit score doesn’t usually matter, as you only need to be 18 years of age or older, have a steady income stream, and have an active bank account to qualify. As a result, you can apply for these loans even if your credit rating is poor. However, the downside of payday loans is that they can be difficult to pay back since they come with high interest rates and short repayment periods.
And while most payday lenders are willing to allow borrowers to roll over the loan, they often throw in high fees that can end up snowballing so fast that you end up in a cycle of debt. Plus, they also tend to charge late payment penalties that can significantly raise the cost of the loan. It is for this reason that you should only ever borrow these loans if you are 100% confident that you can afford to repay them on time.
What Are The Key Differences Between These Two Types Of Loans?
There are a number of key differences that separate these two loans, so we’ve quickly summarized them in the posts below. They are as follows:
Borrowing costs: Installment loan APRs normally run between 3% and 36%, while payday loans can reach 400%.
Loan amounts: Installment loans can be obtained for greater sums and frequently have substantially longer loan durations. On the other hand, payday loans are only ever available in small amounts.
Repayment terms: Installment loans have fixed monthly payments, but payday loans require you to repay the loan in full by the time your next paycheck arrives.
Eligibility requirements: Installment loans can only be accessed by borrowers with a good credit score because it indicates they are likely to repay the loan on time. This is also what enables them to secure lower interest rates. Meanwhile, borrowers with a bad credit score can often be more successful applying for a payday loan via CocoLoan, but those typically come with significantly higher interest rates.
Pros and Cons of Payday Loans vs Installment Loans
All types of loans tend to come with their own benefits and risks to consider. So, before you decide to apply for funding, you must consider your financial situation and uncover which option among these two offers you more benefits than risks.
Benefits of Installment Loans
- Higher loan amounts, especially if you have good credit
- Flexible repayment terms
- Fixed monthly payments
- No prepayment penalties
Risks of Installment Loans
- Extended loan terms that can raise the total cost of the loan
Benefits of Payday Loans
- Speedy funding
- Bad credit scores allowed
- Easily accessible online
Risks of Payday Loans
- Exorbitant interest rates and fees
- Short repayment terms
- High late payment fees
How Do These Loans Affect Your Credit Score?
Installment loans can have a significant effect on your credit rating because most lenders will report any late payments or delinquencies to the relevant credit bureaus. In other words, if you fail to meet a monthly payment, there is a high chance that your credit score will be lowered as a result. However, the good thing about these loans is that if you make your payments on time, your credit score can be boosted.
On the other hand, payday loans do not affect your credit score because payday lenders don’t typically report on-time or late payments to credit bureaus. It is for this reason that they are highly accessible to borrowers of all credit types. However, if you fail to make your payments on time, you will be hit with exorbitant fees that end up raising the total cost of your debt considerably.
Final Verdict: Installment loan or Payday loan?
Installment loans and payday loans are both viable lending options to consider, but when it comes down to deciding which type of funding is better than another, this will often come down to the borrower’s situation.
Installment loans are an ideal pick for those that need to make large one-time purchases or pay large expenses such as debt consolidation, home renovations, car repairs, etc. They are also best suited to borrowers who would rather repay their loan over time rather than everything at once.
Payday loans are a viable option for those who simply need a small, fast cash loan to deal with urgent or unexpected expenses. These can include utility bills, grocery costs, medical fees, etc. They are also a good choice if you have a bad credit score and cannot secure funding from traditional lenders like banks or credit unions.
However, since payday loans come with rather exorbitant rates and fees, you should only ever consider borrowing them if you have completely exhausted any other alternative source of funding. All in all, installment loans are the more affordable and favorable lending option, but payday loans borrowed via CocoLoan can be a lifesaver if you find yourself stuck in a time-sensitive financial crisis.
