Installment Loans vs Payday Loans – Which is Better?

installment loans or payday loans

When there is an immediate need for cash, not everyone has a savings or emergency fund that they can fall back on. Some might use a credit card cash advance, but this isn’t an option for everyone either, and it’s time to look into your borrowing options. 

There are a few options for the types of loan that you can get, and where you might find them. If you have a good credit score of 700 or more, the bank might be an option. Some assume banks are your best option, but when it comes to banks vs online lenders many find that the online option can provide comparable and sometimes better options.  

The most common borrowing options for Canadians are personal loans, installment loans and for some people with bad credit payday loans are an option. Being able to get loans with good interest rates isn’t complicated. Your eligibility depends on your credit score to be qualified for loans with good interest rates. 

When to Choose a Payday Loan

While payday loans are high interest and a costly way to borrow, there are times when this option can make sense for some. For those with a bad credit score, or next to no credit history, the options to borrow a loan can be very limited. The banks won’t approve such an application, but some online lenders will consider many applicants, even if there is risk involved. 

Another consideration about payday loans is that (as the name implies) the loan will become due with interest by your next payday. For some people, this can be the beginning of a debt spiral if they do not borrow responsibly and only request what they can afford to repay. 

For the most part, a payday loan should be used as a last resort when there are no other choices available. The high interest rate of this type of loan is not recommended, but for those with poor credit and few alternatives, it’s an option for some. 

When to Choose an Installment Loan

If you qualify for an installment loan, it’s almost always a better option than payday loans. 

An installment loan can come with repayment terms from 3 to 6 months to a couple years, depending on the amount borrowed, and is much more manageable in terms of repayment. 

An installment loan and personal loan are very similar. The main difference would be that personal loans sometimes have better interest rates, and are more difficult to get approved for. 

Applying for Online Loans

If you’re looking for installment loans or payday loans in Canada, the way to apply is fairly similar, even though the terms might be different. 

Apply online – the first thing would be find a loan option that works for you. Things to look for include the interest rate, APR, and fees. Always review the agreement before signing. 

Loan term – how long of a repayment term will determine what your monthly payments might look like, but keep in mind that the longer you borrow also means you are paying more interest. 

Loan amounts – when applying for installment loans the APR might go up to 40 or 50%, but when applying for payday loans the APR can easily be over 300% and much higher.

The usual requirements for unsecured loans include being at least 18 years of age and a resident of Canada with a reliable income and an active bank account. 

RELATED: How to Borrow – Avoid These Loan Mistakes

The Difference Between Installment Loans and Payday Loans

When it comes to installment loans and payday loans, there’s only a few differences.

The most obvious being payday loans are very short term, where installment loans can allow for months to a year or more to repay. Also, the maximum amount you can borrow with a payday loan is up to $1,500 at most. 

Some other main differences between the two include the fact that installment loans are the better option between the two for interest rates, but payday loans are an option for those with a poor credit history when borrowing is challenging.

RELATED: Personal Loan vs Payday Loan Comparison 

When comparing your options, be aware of some lenders that promise guaranteed installment loans or payday loans for bad credit, or similar offerings like no credit check loans. A lender can’t guarantee a loan, as they need to review your application to see what kind of risk you might be as a borrower. And even if they don’t use credit scores from bureaus like Equifax or TransUnion and rely on alternative data, it’s still a type of credit check. Using licensed reputable lenders are usually your best option when looking to borrow. 

When you don’t have any savings an emergency loan is sometimes necessary to help you get through difficult times. You might be behind on bills, or it could be unexpected expenses like car repairs, a surprise trip to the vet or hospital, or you might just need the funds for travel or something else. Developing strong financial strategies like budgeting and saving can help with creating a better future, but it starts with educating yourself on some basics and continuing to improve on that knowledge for creating financial independence.

 

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