Around 56% of Americans don’t have enough money to cover a $1,000 emergency.
So, what happens to this majority when an emergency strikes? They often go to the bank to get a loan. Applicants can be rejected from getting a bank loan for a variety of reasons, like bad credit, needing more income to qualify, or already maintaining a lot of debt.
What do they do now? They can look into payday or installment loans. If you’re not sure what those types of loans are, keep reading, and we’ll explain them in depth. We’ll also go over the payday loans vs. installment loan debate and guide you to the right type of loan for your situation.
What You Should Know About Payday Loans
A payday loan is a short-term loan for a small amount of money. The loan amount can range from $100 to $1,000, with the average being $500. The amount of money received is decided by your income. Some payday loans can be obtained online or through a storefront.
Payday loans are often approved the same day you apply. When applying, you must have a pay stub to prove you have the income to repay the lender. You usually receive the money through cash or check for immediate use.
These are considered unsecured loans because no collateral is needed, and they don’t usually affect your credit score.
How Long Do You Have to Pay Back a Payday Loan?
The entirety of the loan is often required to be paid back by the borrower’s next paycheck—hence the name payday loan—which is usually two to four weeks. These terms are set in the loan agreement you sign at the beginning—so make sure you pay attention to the date.
Depending on the lender, you can get a rollover to the next pay date. There will be late fees and interest involved with extending the due date.
If you’re lucky to get enough money to pay off your loan early, most lenders allow you to do so. Be aware that some institutions may charge an early payoff fee.
Why Do People Take Out Payday Loans?
This type of loan is quick and (relatively) easy to get, and it appeals to borrowers who need the money now. Getting money within 24 hours of applying can be life-saving for people in emergencies.
Though not every situation is extreme. Around 70% of Americans use a payday loan for recurring expenses like rent, food, and credit card bills.
The third most common reason to get a payday loan is that the borrower wants to get something special. This is especially common during gift-giving holidays.
Probably the most significant allure to payday loans is that bad credit doesn’t matter like it does with many other loans. Those with little to no credit history or bad credit may be rejected for loans through more conventional methods.
What You Need to Know About Installment Loans
Installment loans come in all shapes and sizes. One might be secured (like a mortgage or a car loan), while another might be unsecured. A conventional bank might offer multi-year personal loans amounting to tens of thousands of dollars, whereas Power Finance Texas specializes in loans of up to $1,250 that are repaid in six months or fewer.
The only universal truth that applies to all installment loans is that they get paid back in regular installments.
Different Types of Installment Loans
Installment loans come in many different forms.
Personal Loans
A personal loan is a type of installment loan that can be used for anything and range from $1,000 to $100,000. It’s meant to be paid off between two to seven years.
Your eligibility for this type of loan depends on your credit, income, how many debts you currently have, and the institution you get the loan from.
Student Loans
This is a well-known form of installment loan. Interest rates for student loans depend on whether you get money from a federal or private source. While most students don’t have to pay their loans while in school, interest continues to accrue.
Mortgages
Another familiar installment loan, mortgages are large loans to help pay for a home. This type of loan typically has a repayment plan of 15 to 30 years. If you miss too many payments, you can lose your house since it’s usually used as collateral for the loan.
Car Loans
Similar to a mortgage, car loans use the car as collateral. The loan is for the cost of the car with the goal of paying it off completely in two to five years.
What Credit Score Do You Need to be Eligible for an Installment Loan?
This answer depends on the lender. Some information says you need a score of somewhere around 600 to qualify for an installment loan—but even that number is an average, and some lenders work with borrowers with lower scores.
For example, Power Finance Texas offers installment loans to people even if they have no credit.
When looking for an institution to get an installment loan, make sure to do your research and read the loan agreement thoroughly. If you have any questions about the requirements, ask them before signing anything.
What Happens If You Pay Off an Installment Loan Early?
You’ll have to look at your loan agreement to know for sure, but a penalty fee may be involved. The fee is usually a percentage of your entire loan balance. You may also find a lender that doesn’t charge an early repayment fee, which is why reading your loan agreement closely is so important. Power Finance Texas does not charge any early repayment fees.
A positive to paying off your loan early, besides having one less bill to pay, is that you’ll minimize your debt-to-income (DTI) ratio. This ratio reflects how much debt you have and how much you make. It’s a crucial component of whether a person is eligible for a loan with conventional banks.
Do Installment Loans Affect Credit Scores?
It depends on the lender you get your installment loan from. If your lender did a hard credit check when you applied, that could temporarily lower your credit score.
If your lender reports to credit bureaus, paying on time can improve your score. At the same time, late or missing payments can drastically reduce your credit score.
Repaying your installment loan early can affect your credit score if the lender reported your score when you signed up. When you pay off a loan, you’re closing out an account. The length of accounts helps establish a history for your credit to build upon. The longer the history, the better the score.
This effect doesn’t last forever and is only a concern if you’re trying to build credit.
Payday Loans vs. Installment Loans
Now that we’ve done a brief overview of payday and installment loans, it’s time to compare them.
The Difference Between the Two Loans
The major differences between payday and installment loans are:
- The amount of money potentially available
- The repayment time
- Interest rates
- Qualifications for the loans
- Whether credit is involved
Is an Installment Loan or Payday Loan Better?
One loan isn’t necessarily better than the other, but it can be better for specific situations. For example, payday loans are great for minor emergencies when you need money fast and know you can pay it off on time. If you are concerned about paying it off, you may want to use an installment loan because they tend to have longer repayment periods.
Payday loans are a sure way for those with little to no credit or bad credit to get money. While Power Finance Texas offers installment loans even to borrowers with bad credit, that’s not always the case with other lenders.
Most installment loans are better in situations where large purchases are involved since the loan amount available is much larger than a payday loan, and you have a longer repayment period. Plus, your payments are a mix of interest and principal, so you can see the amount owed going down with each payment.
Let Power Finance Texas Help You When Life Happens
Life is full of little surprises, and sometimes those surprises can be costly. But there’s no reason to lose hope. At Power Finance Texas, we offer a variety of loans to those who need them—even if you don’t have the best credit history.
If you have a valid Texas driver’s license, we can help you with same-day loan options. Learn more about our installment loans today.