If you’ve been keeping up with social media and new tech developments, chances are you’re familiar with online payday loans which have become extremely popular in recent times. Every single time you scroll through your social media, you probably come across numerous ads and blog articles advocating for payday loans (with an equal number of comments urging people to stay away from these instant loans).
Did you know that payday loans are just one form of a larger category of loans, called installment loans? That’s right - while payday loans just entered the retail finance sphere only very recently, installment loans have long been a cornerstone of banking for centuries.
Let’s take a closer look at payday loans and installment loans, and what exactly the difference between the two are.
What are Payday Loans?
Payday loans are short-term cash loans given by lenders to those who need instant loans for an emergency. They are known as payday loans because these cash loans are mainly targeted at salary earners who need some extra money before their paycheck comes in. These instant loans are payable on their salary date, with a relatively high interest. The high interest rates are justified by the fact that most of these instant loans are unsecured loans.
Unsecured loans are loans that do not require the borrower to pledge assets or provide proof of assets as collateral for the loan (assets which will be seized by the lender if the borrower is unable to payback the loan). Unsecured cash loans allow the borrower to get instant loans without needing to provide extensive documentation. The risk of this transaction lies fully on the lender’s shoulders, hence the high interest rate. A quick and easy solution for this is unsecured loans from OnCredit.lk
Payday loans are ideal in certain situations. Here are the benefits and drawbacks of payday loans.
Benefits of Payday Loans
- Quick loans - the entire transaction happens within just a few hours
- Easy - online-based with just 2-3 steps, requiring minimal documentation
- Short-term - repayment period can be within just 1-2 months
Drawback of Payday Loans
- Higher interest rates as they are often unsecured loans
- Many terms and conditions detailing additional applicable fees (late payment fees, rollover fees etc.)
What are Installment Loans?
Installment loans are loans given by lenders that need to be settled by regular payments (also known as installments) for the duration of the loan period. These installments consist of a portion of the borrowed sum and part of the interest as well. The term “installment loans” is very broad and this category encompasses many different kinds of personal or commercial loans, such as vehicle loans, mortgages, personal loans, and student loans. Most loans today are actually installment loans. Installment loans are usually secured loans, which means that borrowers are able to receive longer repayment periods and lower interest rates.
While installment loans are the most popular type of loan nowadays, they also come with their own benefits and drawbacks, as follows.
Benefits of installment loans
- Can have long-term repayment periods
- Tend to have lower interest rates as they are usually secured loans
- Flexible terms of repayment
Drawbacks of installment loans
- Requires borrowers to pledge their assets as collateral so there is a risk of loss of collateral to the borrower in case of default
- Extensive documentation required (letters from employer, salary slips, proof of assets etc.)
- Might take a few days to process and get the cash
Difference between Installment Loans and Payday Loans
Based on the above details, the difference between installment loans and payday loans can be summarised as follows:
- Payday loans are actually a form of installment loans.
- Installment loans have been around for centuries and most of the popular types of loans are actually installment loans too (vehicle loans, housing loans, student loans etc.)
- Payday loans are usually unsecured loans (requires no collateral), while installment loans can be unsecured or secured loans (but are mostly secured loans)
- Payday loans are instant loans, usually received by the borrower within just a few hours whereas the traditional form of secured installment loans requires at least a few days of processing time between application and receiving the cash
- Payday loans are mostly short-term cash loans with repayment periods starting from a few weeks and stretching only up to a maximum of a few months. Installment loans in general are long-term, starting from a one year repayment period, at the very least, and up to more than twenty five years.
- Instalment loans tend to be more flexible in terms of repayment whereas payday loans are far more rigid, with just one day’s delay in repayment possibly accruing a hefty late payment fee.
Both installment loans and payday loans have their significant risks - after all, they are a form of debt that you get into. However, depending on your current cash loan requirement, each has its own set of unique benefits and can prove to be a lifesaver in times of dire need, provided you know what you are getting into and have a solid plan of repayment. If you are a person who is going through such hardships, worry no more. You can simply visit OnCredit.lk and start your registration process. Money will be credited to your account instantly.