The Difference Between Payday Loans and Instalment Loans

Posted on 17th August 2015

Payday loans have become some of the most popular and talked about types of loans that are available in the UK. Millions of people have taken out payday loans to help with their finances. However, payday loans are also competing against new types of loans such as instalment loans. We are going to look at the key differences between payday loans and instalment loans.

What are high cost loan types?

High cost short term credit tends to be short term loan where small amounts can be borrowed but the loan interest can be high because for the lenders, the default rates are high. Defaulting is when a borrower does not pay the repayment that she or he needs to be pay.

The definition of a payday loan

A payday loan is a short term loan that borrowers can take out and repay at the end of the month. The name comes from the idea that you repay the loan at the end of the month when your salary comes through. Payday loans are increasingly becoming popular as people look for alternative sources of cash that are not from family and friends. More people are turning to payday loans as financial pressures become even more personal.

The definition of an instalment loan

Instalment loans are a new innovation in the world of consumer finance. Instalment loans are powered by multiple repayments where they are repaid over a set amount of time. This can be anything from 2 months to even one year. Instalment loans are being used more and more by customers because they suit the changing financial times that we are living in. As wages stagnate but prices rise, more people are becoming financially squeezed and are struggling to make ends meet. Instalment loans have come into the spotlight for this reason. What make instalment loans stand out from the crowd is the fact that they can be renewed every few months. We live in a world where financial requirements such as paying monthly bills, gas and electric as well as paying your car loan have become necessities. People find themselves in financial hardship consistently and frequently, and as such they need to renew instalment loans.

What are the key differences between payday loans and instalment loans?

Payday loan differences

  • Normally paid when you get your salary so tends to be due in one month or 30 days
  • Meant to bridge the gap between running out of cash and getting your salary
  • Smaller amounts of cash such as £100 can be borrowed
  • High interest
  • Can be repaid via direct debit from your bank account
  • Payday loans are unsecured which means that the borrower does not put up any collateral such as a car or a house to get the loan

Instalment loan differences

  • Instalment loans are repaid across several dates spanning a specific duration such as three months for example.
  • The charges you need to pay are rolled into the monthly repayment that you will be making
  • Instalment loans are high cost short term loans because they take longer to clear when a borrower is repaying
  • Longer than payday loans which may suit some financial circumstances but could be a hindrance to others

The type of person that may choose a payday loan

Payday loans may suit your lifestyle depending on what your financial circumstances are. Here are some of the characteristics your life may have if you are going to choose a payday loan:

  • You have a full-time job but you have found yourself in a cash crunch
  • You don’t want to borrow money from family or friends because you want to keep your financial matters private
  • You need money to pay essentials just before the end of the month kicks in
  • You only need a small amount of cash for a specific reason
  • You are having cash flow issues

The type of person that may choose an instalment loan

If you are looking for an instalment loan, you might have the following characteristics:

  • You need to have a loan that you can repay off a few months
  • You can’t afford to pay off a loan straight away
  • Multiple repayments suits your finances for right now
  • You want to borrow a larger amount of cash

Top tips for choosing between a payday loan and an instalment loan

When you are choosing between a payday loan and an instalment loan, it is absolutely critical to follow our special top tips so that you can make the right choice for yourself.

#1 Know the amount you need

Imagine that you are a working professional and you are short on £200. You might be tempted to borrow £500 or £700 in an instalment loan but it is probably a better idea to choose a payday loan. This is especially true if you just need a smaller amount. These are only meant to be short term options that help you when you need cash boost. If you only need to borrow a small amount, just take a small amount first. This will help you with future personal financial management.

#2 Be in steady employment

It’s important to be in full-time employment in order to apply for an instalment loan. The reason for this is because it is a high cost loan which means you will need to be able to keep up with the repayments every month.

#3 Have predictable financial behaviour

Taking out a payday loan or an instalment loan requires some predictable finances. What this means is that you shouldn’t have any excessive spending that happens randomly during the month. For example, don’t go on a random £100 shopping spree buying clothes if you have taken out an instalment loan and you know that you need to repayments.

This type of behaviour can get you caught in a cash crunch especially if you have financial repayments that you need to make. This is why it’s important to have a schedule that is predictable when it comes to instalment loans. Payday loans allow for more flexibility because they are paid in full when you are paid your salary.

Ultimately, instalment loans and payday loans should be used sparingly and only when you understand the financial expectations that they will make you responsible for. If you can handle the multiple repayments of an instalment loan or the monthly deadline for a payday loan, you can consider using short term credit every now and then.

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