When comparing a payday loan and an installment loan, the most noticeable differences between both usually come with the repayment term, interest rates, and loan amount. An installment loan typically offers a higher loan principal, lower interest rates, and more time to repay. However, the specific terms of your loan may differ based on your lender.
Compare Payday Loans with Installment Loans
A payday loan is a short-term cash advance to borrowers that is payable with their next paycheck. The amount involved in a payday loan is small, usually $5,000 or less. Most loans in this category do not also require a hard credit check.
On the other hand, true to their name, installment loans are loans to be repaid in installments. They are best suited for borrowers looking to settle a mortgage, purchase a car, or pay for large expenses.
The best way to understand the differences between payday loans and installment loans is to compare them along the lines of certain metrics. Below is an outline of the characteristics of both loans.
| Payday Loans | Installment Loans | |
| Loan Amount | $5,000 or less | $100 to $100,000 |
| Repayment Term | The next payday, typically within four weeks | Months or years |
| APR | Greater than 300% | 5% - 47% |
| Credit Score Requirement | No minimal requirement | 580+ |
| Type of Credit Check | Typically soft credit pull | Soft or hard credit check, depending on lender |
| Approval time | A few hours | A few business days |
| Impact on Credit Rating | No notable improvement to the credit score when you repay but negative impact if you default on loans | Positive effect on repayment and negative impact on default |
Installment loans and payday loans do seem to have their advantages and disadvantages. Your choice of either loan type will depend on your particular needs and repayment potential. So, ensure you compare and understand the terms of any loan before making the decision.