Payday Loans vs. Installment Loans

As new rules and regulations are being proposed for payday loans, lenders are shifting their focus to installment loans. While the two loans have their differences, they both have one key similarity ­ they result in the borrower winding up deeply in debt. Nick Bourke, Consumer Finance Project Director for Pew noted that by simply converting to installment loans, that doesn’t mean individuals will be able to afford them. “They can still have dangerous interest rates and fees,” he said. So, before you decide to turn to installment loans over payday loans, make sure you understand what you’re getting into.

So, what’s the difference?

A Payday Loan…

• Is a short­ term loan, typically ranging from $100­ $1,000.
• Has average interest rates of 400% or
• Requires payment due at the time of the borrower’s next
• Typically has a loan period of no more than 30
• Can be repaid at any time during the loan
• Is typically unsecured, and the lender assesses the borrower’s ability to repay the loan based on previous recent paychecks the borrower provides to the
• Is repaid either through a post­-dated check (provided by the borrower at the time the loan is made), or by automatic electronic withdrawal once the borrower’s paycheck has been deposited in their bank

An Installment Loan…

• Is a longer ­term loan, of greater amounts ­ typically $5,000 and
• Can have fees and interest of up to 400% APR.
• Is paid back to the lender in installments over a number of months, rather than in one lump sum
• Has a minimum loan period or term of usually 12 months or more. Some installment loans even require you to opt for a 2­ year installment scheme in order to qualify for the loan.
• Cannot typically be settled/repaid early without incurring a large Depending on the lender you are working with, you may even be required to pay the full interest calculated to the end of your loan’s term.

• Is typically secured by personal property.

So, what’s the big deal?

Despite their differences, installment loans are designed with high interest rates and fees and long­term loan plans that trap the borrower in debt, just like payday loans. With payday lenders shifting their focus to installment loans to avoid the new regulations, these loans are now being promoted as the next best option. They’re not. The cost elements of installment loans make them very expensive options, as well. Payday lenders are disguising themselves with installment loans. You’re still paying the same amount and wind up in the same debt trap; it just has a new name.

Be aware of what’s out there and what loans you’re considering. Protect yourself and your finances. If you’re already overwhelmed by the payday loan debt trap, contact us today. We can help!