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Financing is crucial to enhancing our living standards. At various points in life, we’re faced with scenarios requiring us to borrow money to meet necessary expenses. From emergency medical bills to business launches to basement remodels, anything can require immediate cash.
This, however, doesn’t mean that you have to obtain high-interest loans every time you’re faced with a cashflow problem. By constantly turning to payday loans to address life’s challenges, you only trap yourself in a cycle of recurring debt. Instead, it helps to understand how an installment loan works and how it compares. Let’s talk about why the difference can matter to you in the long run.
How Are Installment Loans Different From Payday Loans?
When acquiring a loan, the borrower must acknowledge the fact that it will need to be repaid. No matter how extensive the loan term is, you should remember this critical obligation when borrowing money. Those who ignore this fact end up getting trapped in a cycle of debt with payday loans. These are short-term, high-interest loans designed to help bridge the gap between the borrower’s paychecks.
The rates on payday loans can be outrageously high: 80 times higher than those for auto loans and mortgages and 35 times higher than those for credit card loans. It’s not surprising for a borrower to repay $8000 for a mere $3000 loan.
Designed To Be Paid Off Over Time
An installment loan, on the other hand, is repaid in scheduled payments instead of one lump sum. That structure can help you repay your loan without seeking another loan. Before you sign, make sure the payment fits your budget and that you only borrow an amount that you can repay.
That lowers your risk of getting stuck in the borrowing cycle. We know that life happens, and emergencies come up. A payment you can manage leaves you more room to handle them.
Approval and Deposit Times
How long a loan takes depends on the lender. Some online lenders make a decision quickly and deposit the funds soon after approval, while others take longer.
Applications vary too. Some take only a couple of minutes to fill out, and others ask for more documents. Speed can matter in an emergency, but a fast loan can still be an expensive one, so don’t let it be the only thing you look at.
Flexible Repayment Terms
The repayment terms are where the two loans really differ. Payday loans typically give you 14 to 30 days, while installment loans spread your payments over a longer term. Many installment lenders charge an interest rate instead of fee-based pricing. Check the APR on any loan you’re considering so you can compare it with your other options.
Ask whether your payments can be lined up with your payday, so the money is there when each payment comes due.
How It Can Affect Your Credit Score
On-time payments on an installment loan that is reported to the bureaus can help a credit history, and that can look good to other lenders. Over time, that may improve your chances of getting a credit card, a mortgage loan, or an auto loan.
Not every lender reports, so ask before you borrow. Payday companies often don’t, due to the setup of their loans.
Conclusion
In summary, repeatedly turning to payday loans can destroy your credit profile, making your financial health unstable in the long run. An installment loan can be a better alternative, but only if the rate, the term and the payment all work for your budget.
If you decide to borrow, see your loan options and read the terms of any offer before you accept.