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What Type of Loans Is Right For You

June 21, 2019/in Loan Basics/by Travis Williams

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?

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 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.

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