A payday loan is a short-term, small-dollar, unsecured personal loan.
It’s short-term because you usually have to repay it by your next pay date. And it’s small-dollar because it’s usually $200 – $1,000, although some conditions and exceptions may apply depending on your lender, your finances, and your location.
Another way these loans differ from traditional loans is their Annual Percentage Rate (APR). In most cases, a payday loan has a higher APR than a long-term, large-dollar personal loan because these loans aren’t guaranteed with collateral.
Short-term installment loans may be paid off in a few months. Like payday cash advances, this kind of installment loan is an unsecured alternative with a higher APR than secured personal loans obtained through mainstream banks. Like a payday loan, a short-term installment loan is ideal for unexpected bills or essential household and auto repairs you must take on.
As with payday loans, installment loans may have fewer requirements that are
typically required for loan approval. With less of an emphasis on credit history, the
approval process may increase the chances people with below-average credit
scores will be approved for an advance.
If you live in a state where both payday and installment loans are available, you
may choose an installment loan over alternative products because of its repayment
terms. This may be a better option because your payments are broken up into small
pieces over several installments — giving you more time to repay what you owe.
Compare this to a payday loan where you typically have to repay all the fees and
interest on top of the principal by your next pay date. If you live paycheck to
paycheck like nearly 80 percent of Americans, this repayment structure may not be
compatible with your current financial situation.
The most significant difference between a payday loan and a short-term
installment loan is the repayment time frame.
While a payday loan is typically due on your next pay date, an installment loan is
repayable through multiple scheduled payments. These payments typically coincide
with your pay dates.