There are different types of short-term loans and two of these are instalment loans and payday loans. These are probably some of the most well known and well used short term loans and it is worth therefore understanding the main similarities and differences between them so that you can decide which will be the best for you. Deciding which is better, will depend on what you need from them.
Similarities between payday and instalments loans
These loans are both short-term loans which means that they are repaid relatively quickly compared with more traditional loans. They are also usually arranged very quickly. This type of loan came about to help people in emergencies and therefore they are arranged vey quickly. The longest time is normally a few days, but there are lots of lenders who can get the money into the bank account of the borrower within a few hours.
They also tend to have the same criteria when choosing borrowers. Unlike traditional lenders they will not look at the credit record and use it to judge the risk they are taking on. Many lenders do this and will refuse to lend to people that they fell will not be able to repay. They will judge based on their, previous record for repaying loans and whether they can show that they are capable of making regular repayments. With a short-term lender, they will not judge in this way. These lenders came about to help those with a poor credit record and therefore they expect that they will have had problems showing they are capable of repaying.
They will both have some requirements for borrowers though but these are very few. They will require that borrowers have a bank account as that is where they will put the money that has been borrowed and they will set up a direct debit for repayments there too. They will also need to see evidence of regular payments going into the account. This can be a salary but it could also be benefits, pensions or any other sort of income. This is because they set up the repayment to go out on the day that you are paid so that you have the most money available to give you the best chance of being able to repay.
Differences between them
There is quite a significant difference between the two types of loans. A payday loan is repaid in a lump sum on the next day that you are paid. This means that the loan lasts a very short amount of time as it will be a maximum of weeks and possibly even days before you have to repay it. This can be extremely useful for anyone that does not like being in debt for long. However, there is a problem if the person does not have enough money to repaying it one lump sum. Even if they do, it could be a problem because they might need to use that money for other things, such as bills that come in during the month. Therefore, an instalment loan could be better. This will allow them to repay the loan over a series on months. This makes the repayments more manageable. However, as the money is owed for longer, it will mean that there will be interest charged on the loan. It will be up to the borrower to decide whether they feel that it is worth paying this extra money but as a result they will find that it is easier to repay, there is less chance they will miss a repayment and get extra charges and they will be able to more easily afford their other bills.
Which is best?
To work out which is the best it is important to find out some information. Firstly, find out when you are expected to repay, when and how much. Then you can look at your household finances and work out what you will be able to afford. It is worth making sure that you check whether this is a typical month as well or whether there are likely to be extra expenses. Think about birthdays, yearly bills like MOT, quarterly bills like water rates and things like that which could make it more difficult to manage.
It should not take too much work to calculate how much you could afford to repay and this should allow you to work out which will be the best type of loan. If you can be confident that you will be able to afford a one off repayment and cover all of your other bills, then a payday loan could be better because it is likely to be cheaper for you. However, if you are not sure whether you will be able to do it or you know that it will just be too expensive, then the instalment loan will be the better choice.
Do make sure, once you have decided which loan to go for that you compare different lenders. Then you will be able to be sure that you are picking the lender that will give you the best value for money.