What Type of Loans Is Right For You

Is a Short-Term Installment Loan or a Payday Loan Right for You?

If covering an emergency expense would drain the savings you’ve carefully squirrelled away, you’re not alone. According to Federal Reserve Board Governor, Lael Brainard, 40% of Americans can’t cover a $400 emergency expense without borrowing funds or selling items to cover the expense. If you’re unable to secure traditional financing due to poor credit or timing restrictions, you may find yourself scouring the internet for alternative lending products like short-term installment and payday loans. Because the two types of loans have common features and significant differences, it can be difficult to determine which type of loan is best suited for your situation.

Common Features and Significant Differences

Short-term installment and payday loans both cater to “underbanked” and “unbanked” borrowers with less-than-perfect credit. The Federal Deposit Insurance Corporation (FDIC) reported that 25% of Americans either don’t have a bank account (unbanked) or have a bank account but still used alternative financial services in the last year (underbanked). Borrowers in these segments tend to have low credit scores and higher default rates, resulting in higher interest rates on their short-term and payday loans.

Both payday and short-term loans can be funded much faster than traditional bank loans, have simple application and approval processes, and rarely require collateral. A traditional bank loan can take weeks, if not months, to get funded and will usually require the borrower to put up collateral. Depending on the lender and banking cut-off times, payday loans can be funded the day your application is approved and processed. Short-term lenders can have funds delivered as quickly as the following business day. Although both types of loans share the characteristics of accessibility, expense and speed, they diverge when it comes to maximum loan amounts, number of payments, and length of terms.

Both payday and short-term loans can be funded much faster than traditional bank loans, have simple application and approval processes, and rarely require collateral. A traditional bank loan can take weeks, if not months, to get funded and will usually require the borrower to put up collateral. Depending on the lender and banking cut-off times, payday and short-term lenders can have funds delivered as quickly as the same day or the following business day, respectively. Although both types of loans share the characteristics of accessibility, expense and speed, they diverge when it comes to maximum loan amounts, number of payments, and length of terms.

The Consumer Financial Protection Bureau (CFPB) describes payday loans as “small-dollar loans, of generally $500 or less.” They are typically repaid in one lump sum by the borrower’s next payday in the form of an automatic bank withdrawal or a post-dated check. Short-term installment loans can range from several hundred to thousands of dollars. They are repaid with multiple, fixed payments made over a matter of months or even years.

When Is a Short-Term Installment Loan the Right Choice?

If you need a larger loan, more time to pay it pack, and want to be able to plan your finances around predictable payments, choose a short-term installment loan. You may have to wait an extra day or two to receive funding in comparison to payday loans, depending on the provider. Short-term loans typically have lower interest rates, and some lenders allow you to pay your loan off early without prepayment penalties. You can save a significant amount of money on interest by paying your loan off as early as your finances allow. Be sure to find out before signing any loan documents if your lender offers this penalty-free prepayment policy.

When all traditional financing options have been ruled out, a short-term installment loan will be the better bet in most cases because of the more realistic repayment terms and possibility of a penalty-free early pay-off. A payday loan would be the better option only if you needed a smaller amount of money immediately, and you’re positive you’ll be in the 20% of payday customers who pay back their loan on time.

When Is a Short-Term Installment Loan the Right Choice?

When all traditional financing options have been ruled out, a short-term installment loan will be the better bet in most cases because of the more realistic repayment terms and possibility of a penalty-free early pay-off. A payday loan would be the better option only if you needed a smaller amount of money the same day, and you’re positive you’ll be in the 20% of payday customers who pay back their loan on time.

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*Funding Times: In most cases, funds will be deposited into your bank account the business day after your application has been processed and approved, if you meet your lender’s cut-off times. To avoid delays, respond to communications from your lender as soon as possible. Please note that each banking institution has its own procedures regarding how/when transferred funds are released to their customers. These procedures may delay access to funds transferred by your lender.

Customer Notice: LoanStream LLC is not a lender or a broker. LoanStream LLC works with a network of lenders offering short-term loans. Loan terms, including loan amounts, repayment terms, and transfer times, vary among lenders and may be dependent upon the laws of the state in which you reside. Some lenders may require documentation provided via fax or email. If you are connected with a lender, you may be directed to a third-party website whose Privacy Practices and Terms of Use may significantly differ from our own. You are encouraged to read your lender’s Privacy Practices and Terms of Use. Short-term loans are intended to provide consumers with short-term financing and should not be considered a long-term financial solution. Only borrow an amount you know you can repay without undue financial strain. Consumers facing debt and credit difficulties should seek out debt and credit advisory help.

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APR Information: Annual Percentage Rate (APR) is a measure of the cost of credit, expressed as a nominal yearly rate. It relates to the amount and timing of value received by the consumer to the amount and timing of payments made. Loanstream cannot guarantee any APR since we are not a lender ourselves. An APR can generally run between 5.99% up to 35.99%. Loan products generally have a 61-day minimum repayment term and a 72-month maximum repayment term. Before accepting a loan from a lender within our network, please read the loan agreement carefully as the APR and repayment terms may differ from what is listed on this site.

Representative Example: If you borrow $5,000 and the loan had an 8% origination fee ($400), on a 48 month repayment term at a 19.25% APR, the monthly repayment will be $134.16. Total repayment will be $6,439.50. Total interest paid will be $1,039.50.

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