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What is the main difference between a payday loan and an installment loan?

 Short-term Payday loans are unsecured loans for the financially vulnerable: the low-income, the elderly, and those with limited financial education. Payday lenders don’t do credit checks and, depending on your state’s restrictions, they can’t even check your income first.

Quick money without a credit check? What could hurt

Well, a lot. Payday loans charge unfair interest rates and massive interest rates, which means that they have exceptionally high annual percentages (APRs) that allow you to see the total cost of a loan.

Certified financial educator Maggie Germano says Payday loans are generally very negative for the borrower. Interest rates and fees are increasing and many people cannot pay them on time. Whenever you miss your payment due date, the amount owed increases dramatically. This makes it impossible for people with a paycheck to pay them. This can destroy a borrower’s balance and delete their bank account. It can be tempting to try the fast and risky option with short payment terms but remember: it’s a trap. 

Installment loans: the Lion King of loans

In terms of payment, installment loans are the exact opposite of payday loans. Instead of having to make a large payment in a short period of time, installment loans offer you the possibility of making smaller and regular payments over a much longer period.

Most installment loans offer you a much lower APR than a dangerous payday loan and, unlike many payday loans, do not impose a stealthy prepayment penalty.


What is a prepayment penalty? Law professor David Reiss sums it up well: “Prepayment penalties come into play if the borrower repays a loan in whole or in part before the payment schedule, which the borrower and the lender agreed when the loan was first granted. In theory, they compensate the loan Lenders for the cost of granting the loan in the first place and any interest payments that the lender would receive due to early repayment In practice, prepayment penalties can be a new profit center for lenders if interest rates exceed the actual rate. Prepay lost amounts. A good installment lender will also report your payments to the credit bureaus so you can build up your loan and be eligible for a better loan next time.

Which loan is best for you?

If you know with 110% certainty that you can pay off your loan with all interest and fees once it is due, a payday loan can be a viable option. But this is generally not the case. In fact, according to the Office of Financial Consumer Protection, four out of five borrowers are forced to invest again (by extending the term of their loan at the cost of a different set of fees and interest) 1 and borrowers on Average wages owe their lender 200 days a year. So remember that with a payday loan, the odds are never in your favor.

Installment loans are a safer option, especially if you find a lender who is willing to define the terms that apply to you. It is also important that they have good customer service representatives so that you can contact someone in advance if you are concerned about missing a payment. Finally, make sure there are no prepaid fees and report your payments to the credit bureaus so you can get the best loan next time.


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