Payday loans are not installments or revolving loans. Instead they are short-term, cash loans paid into your account by a lender, usually in one lump-sum and are repaid at an agreed upon date by you and your lender, or sometimes in two withdrawals.
Installment loans are also usually paid into your account in one lump sum. But unlike payday loans, installment loans are repaid in a series of installments over a set period of months or years.Revolving loans are different to payday loans and installment loans. Revolving loans allow you to borrow money repeatedly up to a specific set limit while making monthly installment payments without you applying for a new loan.
Payday loans, unlike the other two types of loans , are short-term loans that are intended to cover unexpected expenses such as medical bills, veterinary bills, auto repairs, house repairs, or to provide you with a small amount of extra cash that will keep you covered until your next payday. It is important, when looking for a payday loan, that you know that you are be able to repay the loan on-time and in full when the balance is due. If you are late in making repayments, you might incur late fees and damage your credit score.
What is an Installment Loan?
An installment loan differs from a payday loan. With an installment loan, you make repayments over a set period of time (usually over several months or years) in ‘monthly installments’. With payday loans, you generally repay the entire balance at an agreed-upon date. Installment loans have several advantages. One is that they generally come with lower interest rates. Another is that you are able to choose the life of the loan in order to fit with your budget.
Installment loans tend to be unsecured loans, meaning that you do not have to put up your car or property as collateral. However some lenders do offer secured installment loans where you can put your property or car up as collateral. This can lower the rate of interest that you owe.
What Is a Revolving Loan?
A revolving loan allows you to borrow money repeatedly (up to a specific set limit) while making monthly installment payments without applying for a new loan. With a revolving loan, you can access funds up to a maximum amount which is known as your credit limit.
Revolving loans are usually issued by financial institutions, and are known for their flexibility since you can repay and borrow at your discretion (as long as it is within your credit limit).Revolving credit is different to what is commonly known as the payday loan trap. The payday loan trap is when a borrower is unable to pay back the payday loan when the balance is due, so they roll it over. This means that they are essentially taking the same loan out again and again, but with additional fees each time. This leads to a spiral of debt that is often difficult to escape.
Alternatives to Payday Loans
Payday loans can be incredibly useful when you need some extra cash to keep you afloat until your next payday. However they are only intended to be short-term solutions. There are several other options that you should consider as well as, or as an alternative to, payday loans:
- Borrowing from Friends and Family. When in need of financial assistance, the first thing to do should be to talk to a trusted friend or family member about it. They may be able to loan you some money to help. These kinds of loans often come with little or interest so can be the ideal solution. However it is important to set out a strict, and feasible repayment plan for the loan so that you do not risk damaging the relationship through lack of repayment.
- Payday Alternative Loans (PALs). Payday Alternative Loans are offered by credit unions and generally cost much less than a payday loan. Loans can be up to $2000 and are generally repaid within one to twelve months. You must be a member of the credit union for at least a month before applying. Most PALs are not based on good credit, but rather the borrower’s income and their ability to repay the loan.
- Peer-to-Peer Lending. Peer-to-peer lending sites work by connecting borrowers directly to lenders, known as investors, who lend money to qualified applicants. Each site lists the terms, rates, qualifications, variable minimum and maximum amounts, fixed interest rates, and the application process.
What Happens if I Cannot Repay a Payday Loan?
If you know that you are unable to repay your payday loan when the balance is due, it is important that you immediately contact the lender. They may be able to work out a different repayment plan, or different repayment terms, that will better suit your current financial situation.
Inability to repay your payday loan can lead to unfortunate consequences. These include damage to your credit score, a potential court summons, collection calls and expense compounding overdraft fees.