The different types of personal, short term loans can be hard to navigate. When you’re looking for a quick loan, there are two main varieties to choose between payday loans or instalment loans (which you might see spelt as ‘installment loans’). Moolr is expert in both and has put together this guide to help you understand the difference between payday loans or instalment loans and to know which is better for you.
Payday Loans or Instalment Loans?
While instalment and payday loans have a lot of similarities, they are different types of short term loans that work for different people. This depends on your circumstances. And what you intend to do with your borrowed funds.
The similarities
Payday and instalment loans are both short term loans. They allow you to borrow a small amount of money over a short period. It depends on your lender as to how much a lender agrees to lend you. It can range anywhere from £50-£1000 with the limit often being lower for first-time customers.
Lenders provide such loans with the purpose of providing emergency money when you’re caught short. It is vital that whichever you choose, you can afford to pay it back in the time frame agreed upon by you and your lender.
Payday Loans Or Instalment Loans? The difference
There are a few differences between payday and instalment loans. However, the primary difference is in the way that debtors repay them. Payday loans are short term loans that you pay back in one amount after 1-35 days (depending on the lender). Instalment loans, on the other hand, you pay back over the course of multiple months.
Instalment loans vary considerably but the overall loan you repay in multiple instalments over a longer period of time compared to payday loans. You repay most small instalment loans between 1-6 months (depending on the lender), with 3 monthly instalments being the most common. This can make it easier to afford the repayments because you pay back smaller amounts each month rather than a larger single repayment.
There are varieties of larger loans that can be classed as instalment loans because they’re paid back in monthly instalments until the overall loan has been repaid.
Payday Loans or Instalment Loans? Quick Comparison
This quick comparison list should give you a quick overview of the difference between payday and instalment loans and which might work better for you.
The Borrower
While everyone will borrow money for different reasons and with a different set of circumstances, each loan lends itself well to different typical borrowers:
Payday Loans are suitable for:
- Bad credit scores or thin credit history.
- Those looking for smaller loans.
- Low-income borrowers.
Instalment Loans are suitable for:
- Bad or good credit scores, depending on the lender.
- Those looking for small to medium-sized loans.
- Those who can afford to pay back smaller amounts over a longer period.
Payday Loans or Instalment Loans? Cost of Loan
When taking out a loan, you will need to pay back the amount borrowed with additional interest, which will vary according to the lender. This is how lenders make money from loans. The different types of loans have different costs.
Payday Loan Costs:
- Known for having very high APR/interest rates.
- Often balanced by the fact the loan is paid back over a short period.
Instalment Loan Costs:
- APR and interest vary greatly between lenders.
- Paying over multiple months helps to spread the cost.
Loan Terms
The terms of each loan will vary a lot between different lenders, so it’s vital that you thoroughly read all the information that a lender provides. However, there are some patterns in terms when it comes to instalment vs payday loans.
Payday loans:
- Paid back in one instalment
- Usually between 1-35 days (depending on the lender)
- Loans can be borrowed to the exact £ you need
Instalment loans:
- Paid back in multiple instalments
- Usually over 1-6 months (depending on the lender)
- Loans can be borrowed to the exact £ you need
Payday Loans or Instalment Loans? Which Is Better?
When asking whether a payday or instalment loan is better, you have to consider your own personal circumstances, requirements from a loan and your financial situation for repayment. It will depend on these which type of loan would be better for you.
If you need a smaller amount of cash for a short time to cover an emergency payment before you’re next paid, then a payday loan might be the better choice. If you need to borrow a slightly larger amount then an instalment loan might be best for you; the method of repayment makes borrowing larger amounts more affordable.
If you have a bad credit score, you might find it easier to get a payday loan — although this isn’t always the case as many instalment loan lenders cater for borrowers with bad credit.
Conclusion
You should also consider how you can afford to repay the loan. If you know that you can cover it completely in your next payday — while still affording your normal costs such as rent, bills and food — then a payday loan could be a great option. Alternatively, if paying the money back in smaller instalments over a few months helps to ensure that you can afford the repayment, then an instalment loan could be the better choice for you.
