With the ever-growing costs in this expensive world, it is quiet common to run out of money in between the paychecks. Payday loans, usually targeted at low-income groups, come to rescue under such situations of unexpected financial needs. They have been instant success due to their ease of approval, faster processing, and convenience – all just a click away. Owing to the popularity of payday loans, there is a remarkable increase in the number of lenders across the locations.
What is a payday loan?
A payday loan is the cash lend for short-term, usually within two weeks to 30 days, and is issued against a post-dated check or a scheduled automatic deduction from the borrowers account. The amount granted under payday loan falls under the range of $100 to $1,500.
Payday loans are risky
Though the payday loans are quick and convenient, there underlies a factor of risk as well. The major risk in lending money in the form of payday loan is that the interest rates are higher than any other loans. Also, upon renewal or the failure in repayment of the amount within the time frame, the principal amount is added with the new compound interest. There is a possibility of it turning into a vicious cycle that leads to bankruptcy of the borrower or a complaint registered in the credit bureau. This may further result into a bad credit history.
Installment loans are the alternative
Among many other available options, installment loans seem to be a better alternative for payday loans. Though the basic idea of both installment loan and payday loan, referred to as “small-dollar, high-cost”, is to lend money they differ from each other in the following aspects.
- Installment loans give the feasibility to repay the amount within a period of over months to years, while payday loans are supposed to be repaid in two weeks – 30 days.
- There is a possibility of renewing installment loans or increasing the loan amount after some monthly payments. Payday loans can be renewed but at the cost of additional charge.
Benefits of installment loans
Installment loans can be considered as safer transactions when compared to payday loans. The striking benefits of installment loans are as follows
- Decides an affordable monthly installment for the borrower based on the income and credit history
- Helps create a good credit history
- Do not involve any penalties before payment
- Safe and economical as compared to payday loans
- Legally operated and are monitored under the regulation of State and Federal agencies
Payday loans or installment loans, both have their own pros and cons. Either of them proves to be useful only when repaid on time. Hence the choice of loan has to be made wisely so as to avoid unforeseen difficulties.