Understanding the Difference Between Payday Loans and Installment Loans

If you’re facing an unexpected expense beyond your budget, you might look for quick financing options to get extra cash as quickly as possible.

People often weigh the pros and cons of payday loans vs. installment loans when they need an urgent car repair, help with a medical expense, or need to travel for an emergency. However, you’ll need to understand the difference between a payday loan and an installment loan to choose the right solution for your immediate needs.

In this article, Tower Loan compares payday and installment loans to determine which is best for getting money quickly.

What Is a Payday Loan?

A common question among prospective borrowers is “What is a payday loan?”

Payday loans are short-term, high-cost loans providing you with immediate cash until your next paycheck. People often borrow a small amount—perhaps just a few hundred dollars—and repay it to a lender within 2 to 4 weeks.

Is a payday loan an installment loan or a revolving credit line?

It’s neither of these because it’s a single-payment loan, which must be repaid in a lump sum. A payday loan typically has a very short repayment period and high fees and interest, sometimes a 300% APR or more. Installment payments for payday loans are generally not available.

The pros of a payday loan include fast access to cash (often within just one business day) and minimal credit requirements. However, payday loans come with extremely high borrowing costs, a short repayment window, and a high risk of falling into a cycle of debt if you can’t repay the money quickly.

What Is an Installment Loan?

Meanwhile, an installment loan is a lump-sum loan you receive and repay with fixed monthly payments. Banks, credit unions, and online lenders offer installment loans, often for personal expenses and debt consolidation.

Installment loans are usually larger than payday loans and range from a few hundred to several thousand dollars. The repayment period is longer, often 6 to 60 months. Interest rates and fees are generally lower with installment loans than with payday loans, though rates vary by lender and credit score.

The pros of installment loans include predictable, manageable monthly payments and longer repayment periods, which can reduce your immediate stress. You can even help improve or build your credit by making on-time payments on an installment loan. However, you’ll need to undergo a credit check and make a longer-term commitment with an installment loan. Also, missing a payment on an installment loan will harm your credit score.

Key Differences Between Payday Loans and Installment Loans

As you consider the pros and cons of installment loans vs. payday loans, here are the key differences to take into account:

Loan Amount

• Payday loan – smaller, usually $100 to $500
• Installment loan – larger amounts (ours are up to $6,000 online or $20,000 with an office visit)

Repayment Term

• Payday loan – must be repaid in one lump sum by your next paycheck
• Installment loan – monthly, scheduled payments over a longer period of time

Interest Rate

• Payday loan – potentially triple-digit APRs
• Installment loan – lower interest rates, especially for borrowers with good credit

Credit Impact

• Payday loan – minimal or no credit check
• Installment loan – credit check required, but can boost credit with on-time payments

Debt Trap Risk

• Payday loan – high rollover risk, and repeat borrowing is common
• Installment loan – reduced risks due to a predictable repayment schedule

Which Loan Type Is the Better Option?

To decide between payday loans and installment loans, consider the purpose of your loan—whether it’s an emergency or a planned expense. Assess your ability to repay it and compare the total interest, fees, and repayment terms to understand the full loan cost. Your credit situation may help you qualify for lower-cost alternatives.

A payday loan may make sense in occasional circumstances, such as when you have an urgent cash need and no other options. You should feel confident that you can repay it in full with your next paycheck.

However, an installment loan is usually a safer option when you need more time to repay or when you need to borrow a larger amount. If you want a predictable payment schedule and lower costs over time, an installment loan may be the better option.

However, before choosing between installment loans and payday loans, you might also consider alternative options, like borrowing money from someone you know, seeking a credit union payday alternative loan, using emergency savings, or negotiating payment extensions with your creditors.

How to Evaluate and Compare Loan Offers for Any Loan

Now you know the difference between payday and installment loans, here’s how to compare the loan offers you receive:

• Check Annual Percentage Rates (APR) and understand all associated fees
• Know when payments are due and how much you’ll end up paying in total
• Determine whether payments will comfortably fit within your budget
• See if a specific credit score or income level is required before you apply to avoid an unnecessary hard inquiry
• Look for lenders reporting to credit bureaus, follow state regulations on fees and interest, and offer clear terms

FAQ About Installment Loans vs. Payday Loans

Tower Loan is not a payday lender but rather a reputable provider of installment loans you can responsibly rely on when you need cash urgently. We offer an easy application process online or in person by visiting one of our many offices.

Our loans are flexible, versatile, and convenient to manage and pay off according to schedule through our mobile app.

Here are some of the most common questions customers ask when they visit a Tower Loan office and are trying to decide between payday loans vs. installment loans:

What credit score do I need for an installment loan?

Credit requirements vary, but many lenders, including Tower Loan, are willing to work with borrowers with a wide range of credit scores.

Can I pay an installment loan off early?

At Tower Loan, you’re welcome to pay off your installment loan early without any prepayment penalties. By doing so, you’ll reduce the total amount of interest you’ll owe.

What happens if I can’t repay a payday loan?

If you can’t pay back a payday loan on time, you’ll face extra fees and perhaps even bank overdrafts and collection calls.

Are there state laws that regulate these loans?

Yes, every state in the U.S. has rules governing loan limits, repayment terms, and interest rates for both payday and installment loans.

Can payday loans ever help build credit?

Not really, as payday lenders don’t usually report to credit bureaus; however, installment loans can help you improve your credit if you make on-time payments each month.