Instalment Loans and Payday Loans compared

What are instalment loans?

Installment loans are the types of loans that require the borrower to pay specific amount every month over a certain period until the total loan amount including interest is liquidated. Instalment loans can be secured or unsecured. Good examples of instalment loans are car loans, student loans, mortgage loans and home equity loans.  Many lending institutions offer online installment loans these days. This is different from revolving loans in the sense that you are borrowing a specific amount per time. But in the case of revolving loans, you will need to establish a credit line up to a specific limit. However, you don’t need to draw the entire approved credit line at a time. You only tap into the amount any time you are in need of cash.

The main difference about instalment loans and revolving loans is that, for revolving loans, you will only need to pay interest on the amount drawn. That is, you don’t pay interest on the approved line of credit. But in the case of instalment loans where the entire approved amount is released to you at once, the interest will be calculated on the total loan amount.  That is why it is good you don’t borrow instalment loan beyond what you actually need so that you don’t pay too much as interest expenses. A good example of revolving debts is credit card balance. If you use your credit card to make purchases, you will only pay interest on any unpaid card balance and not on your credit limit.

Apart from the interest rate, the way your lender calculates the interest payable on the instalment loan will impact on the dollar amount you will pay as interest on the loan. The interest can be a flat rate based on the total loan amount using simple interest. Alternatively, the interest may be charged on the loan balance per time. Let’s look at how these two methods of calculating interest on instalment loans affect the interest that you will need to pay.

Let’s assume that you borrow an instalment loan amounting to $2,400 at 25% interest rate per annum. You agree to repay the loan over a twelve months period.

Option 1

By simple interest method, the interest amount payable on the loan will be $600 (i.e. 25% x 2,400. The repayment schedule will be as follows:

Month Loan+Int Repayment Balance Principal Interest
1 3000 250 2750 200 50
2 2750 250 2500 200 50
3 2500 250 2250 200 50
4 2250 250 2000 200 50
5 2000 250 1750 200 50
6 1750 250 1500 200 50
7 1500 250 1250 200 50
8 1250 250 1000 200 50
9 1000 250 750 200 50
10 750 250 500 200 50
11 500 250 250 200 50
12 250 250 0 200 50
Total 2400 600

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Option 2

If the interest is calculated on the loan balance per time, let’s find out what the dollar interest amount will be.

 Month Loan Int Loan+Int Repayment Balance Interest Principal
1    2,400.00         50.00    2,450.00 228.11    2,221.89         50.00       178.11
2    2,221.89         46.29    2,268.18 228.11    2,040.07         46.29       181.82
3    2,040.07         42.50    2,082.57 228.11    1,854.46         42.50       185.61
4    1,854.46         38.63    1,893.10 228.11    1,664.99         38.63       189.48
5    1,664.99         34.69    1,699.67 228.11    1,471.56         34.69       193.42
6    1,471.56         30.66    1,502.22 228.11    1,274.11         30.66       197.45
7    1,274.11         26.54    1,300.65 228.11    1,072.54         26.54       201.57
8    1,072.54         22.34    1,094.89 228.11       866.78         22.34       205.77
9       866.78         18.06       884.84 228.11       656.73         18.06       210.05
10       656.73         13.68       670.41 228.11       442.30         13.68       214.43
11       442.30           9.21       451.51 228.11       223.40           9.21       218.90
12       223.40           4.65       228.06 228.11 –         0.05           4.65       223.46
     337.27    2,400.05

Read Also: Short Term Loan for Bad Credit – Payday Loan

If you compare the two options, you will realise that the option 2 where interest is calculated on the loan balance is far cheaper. While you will need to pay interest of $600 in the first option, you only need to pay $337.27 in the second option. This amounts to a saving of $262.73. Besides, you will only need to make monthly repayment of $228.11 instead of $250 in option 1. This will ease your cash flow to some extent. That is why it is always good to shop around and ask questions on how the interest will be calculated so that you can be sure that you are getting your instalment loan at a good rate. As you can see from the second option, you will pay the highest interest of $50 in the first month. As you keep paying down instalment loan, the interest amount at the end of each month will continue to decrease. Chunk of the monthly payment can be channelled towards paying down the principal.

How much instalment loan can you get?

The amount of installment loan you can get will depend largely on which of the instalment loans you want to apply for. However, let’s limit ourselves to the unsecured short term instalment loans which can be paid back within six to twenty four months. I mean the instalment loans that you don’t need to pledge any collateral such as a car or home. On average, most lenders will approve the sum ranging between $100 and $3,000. This type of instalment loan is basically available to help you cover for short term financial needs. The amount of loan that will be granted you may be influenced by your level of income and credit score. No lender will be willing to lend you the money you will not be able to pay back.  The processing time for instalment loans is relatively short as long as you are able to supply the required information. You can actually get the money deposited into your bank account within few days after your application has been approved. Also, the fact that the loan requires a monthly payment of specific amount, you can predict your cash flow accurately. This will help you know how much you can comfortably pay every month and still be able to meet other obligations.

Payday Loans

Just as the name implies, payday loans are the loans you take against your next pay check or income. The amount you can borrow may range from $100 to $1,500 and this will depend on your income which will largely determine your ability to pay back the loan. The term for payday loans is shorter than instalment loans as you will be expected to pay back your payday loan within 30 days. You are actually borrowing against your next pay check. The APR payable on payday loans could be astronomically high when compared to instalment loans. People choose payday loan as an option when then are pressed for cash. There may need to make immediate payments such as medical and utility bills when you are still expecting your pay check. At times, your pay check may come late in a particular month when you have already made some commitments. Before your application for payday loan may be approved, the lender may require that you deposit a post-dated cheque. Also, the fee on the loan may be deducted upfront. Therefore, you should factor in the likely fee to the amount you require so as to ensure that the amount will be sufficient for you to meet the intended purpose. Before you provide your sensitive information to any payday lender, you should ensure that they are genuine. There are many scammers out there promising instant payday loans with bad credit. Don’t fall victim of identity theft.

Read Also: Online Loans: How to apply for payday loans online

Installment Loans Vs Payday Loans

Between instalment loans and payday loans, which one can I choose? That is the question many people will ask. Before you decide on whether to apply for instalment loan or payday loan, you will need to assess your situation. Your choice for a particular loan may be influenced by the following:

  • Amount required: If the amount you need is quite more, it may be beyond what payday loan lenders may be willing to grant you. In that case, instalment loans may be your choice. However, if the money is relatively small and you are sure that you will be able to pay at the due date, payday loan may be ideal.
  • Urgency: Payday processing is very fast. In fact, it is possible for you to get the money deposited into your bank account within 24 hours after you have submitted your application. Instalment loans may take longer time.
  • Length of repayment period: How long do you think it will take you to pay back the loan? If you will not be able to pay the loan back within 30 days, instalment loans will be your best bet. However, lenders can allow you to roll over your payday loan if you can’t pay back at the due date. The cost involved will be too high. With payday loans, a loan of $500 can easily grow to $1,000.
  • Collateral: Although some lender may not require that you deposit collateral before they grant you instalment loans, you can offer this on your own if you have it and you are sure that you will be able to repay the loan. In this case, you will be able to get your instalment loan at a good rate.
  • Credit Score: If you have a very good credit score, you can take advantage of this. With good credit rating, you will be able to get instalment loans at a very good rate. You can visit the websites that offer online installment loans comparison for compare rates. However, if your credit is bad, you may not be able to get any lender that will consider you for instalment loan. In this case, payday loans may be a good option for you.It is important that I mention that you should not just consider your current credit score, you should also consider the impact that the instalment loan may have on your credit if you are unable to pay it back promptly. You need to ensure that you pay promptly. Late payment or default may be reported to credit bureaus and this will appear in your credit report. This can ding your credit score

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