When you need money there are quite a lot of options available. Typically, you can take mortgages, car loans, personal loans, loans against retirement funds and insurance policies, and payday loans. All these loans,with the exception of payday loans, can be paid back in installments. A payday loan, however, needs to be paid back in a lump sum. While this is the primary difference, it does not necessarily make one type of loan better than the other.
A Payday Loan Explained
Usually disbursed by private lenders, payday loans can be obtained very quickly without any major formalities and collateral by people who are employed. The only security available to the lender is the borrower’s next paycheck. The reason why lenders are prepared to assume this kind of a risk is that the interest rates are commensurately high and their income is boosted due to various associated fees.
Pros and Cons of Payday Loans
Payday loans can be taken very easily by anyone with regular employment. The processing is simple and fast with the disbursement taking just a few minutes. Most cities have a number of loan agencies and it is also nowadays very easy to apply online. Payday lenders are usually the only option available when other sources cannot be availed of.
Payday loans tend to be expensive but it may be worth it as they are very easy and quick to get. However, beware of scam agencies who will try to rip you off. Remember, not to make payday loans a habit because then you will always have to devote a chunk of your next paycheck to settle the loan.
Installment Loans Explained
In an installment loan, the borrower has the flexibility of being able to pay back the loan through a series of payments, usually monthly, over a specified time period. Typically, these are car loans and home mortgages; however, recently, personal unsecured loans have also been included in its ambit.
Pros and Cons of Installment Loans
The biggest advantage is that you know both the amount to be paid monthly as well as the period for which you have to pay. This makes it easier to plan your finances. You can opt for an extended tenure to keep the monthly payment down; however, this will add to your interest costs. The loan process is simple, however not as quick as that of payday loans.
Highinterest rates, though lower than that applicable to payday loans, remain a concern. If you take a loan for a long tenure, your total interest outflow will very likely to be more than on a payday loan. Missing payments can cost you dearly in penalties.
If you need to handle a sudden cash crunch, a payday loan makes sense; however, if the sum is large and cannot be covered by your paycheck, an installment loan makes more sense. Even though typically, payday loans carry a higher rate of interest, a poor credit rating can make an installment loan as or more expensive.
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