Payday loans v Instalment loans

With so many short-term unsecured loan products on the market, it is important for you as the consumer to know exactly what each type of loan is and what to expect should you sign on the dotted line for one.

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In this article, we will take a look at two very popular short-term loan options – the payday loan and the instalment loan. Let’s start by nailing down the definitions.

Payday loans are…

These loans are given by lenders for a very short period of time. The basic premise is this. Someone needs urgent money but it’s a while to payday. They can take out a payday loan that allows them to use the money they have lent and repay it once they receive their salary at the end of the month. These loans are becoming very popular as individuals are finding themselves under more and more pressure in these difficult financial times.

Instalment loans are…

Instalment loans are slightly different. Here, someone taking out a loan will repay it over a set number of repayments and at a set amount. Both the number of payments as well as the monthly repayment amounts are agreed with the lending institution. As the world we live in changes every day, especially financially, the ability to set your own parameters for both amount for repayments as well as how long you would like to repay the loan for, are all very attractive. Of course, it has to fall into the parameters set by the lending institution based on what you can afford.

What are the dissimilarities between a payday and an instalment loan?

Let’s take a look at payday loans first.

  • These loans are paid into your account before you get your monthly salary and you pay them back as soon as you are paid at the end of the month. Sometimes this payment can be set up automatically, which ensures that you do not default.
  • It is designed to give you cash to help you reach your next payday.
  • The amounts borrowed when taking out a payday loan are typically very small.
  • Payday loans have a very high-interest
  • This unsecured loan needs no form of collateral to be put up by the borrower.

 

Now let’s take a look at instalment loans.

  • These often have multiple payments stretched across a certain number of months.
  • Interest is lower than a payday loan but added to each monthly instalment.
  • Typically, you can secure a much higher borrowed amount with an instalment loan but this will take a longer time to pay off.

Who chooses payday loans?

There are distinct reasons why a person may choose to opt for a payday loan. People who opt for these loans often:

  • Have a regular job, but struggle to make ends meet from month to month.
  • Are too embarrassed to ask their family or friends to lend them some money to pay for unforeseen bills or in some cases essentials (such as groceries) that they cannot pay for.
  • Just need a very small amount of money to get by for the month.
  • Have increasing difficulty with cash flow problems that are getting more and more frequent each month.

Who chooses instalment loans?

People who opt for an instalment loan often:

  • Want a loan that can be paid off over a period of time that suits their needs.
  • Need to borrow a fairly large amount of cash, bigger than a payday loan will be able to give them.
  • Don’t have the means to pay off the loan in a short period of time, but can afford to do so over a number of instalments.