The alternative to payday loans has its own risks


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Payday loans are designed for people with bad credit or little credit history. These loans come with exorbitant interest rates and payday lenders can be predatory. Taking out high-interest loans to cover day-to-day expenses often plunges borrowers into a deeper cycle of debt. Despite this, IBISWorld, an industry research firm, predicts the payday loan industry will grow 5.1% this year.

For people who need money fast, payday loans and short-term loans may seem like the solution. However, installment loans are generally much safer and much cheaper in the long run.

Payday Loans vs Installment Loans

Payday loans and installment loans are similar in that they provide a short-term solution when you need cash immediately. The main differences between payday loans and installment loans are whether they are unsecured (i.e. whether collateral is needed to secure the loan), the amount you can borrow, and the time available to you. granted to repay the loan, plus interest and fees.

Payday loans are usually smaller, like a few hundred dollars, while installment loans can go much higher. Payday loans are also repaid all at once by the borrower’s next pay period. Conversely, installment payments are paid in increments over several months or years.

Both types of loans carry risk, but in general, installment loans are much less risky than payday loans.

Payday loans Installment loans
Warranty requirement Secure and require guarantees Not guaranteed and does not require a guarantee
Amount of the loan Usually $500 or less Up to $100,000
Repayment Terms A lump sum during your next breakdown Paid over several months or years
Interest and fees Up to 400% and varies depending on your state of residence Lower than payday loans, but varies depending on your credit score

Payday and short-term loans

Payday and short-term loans are generally unsecured and do not require collateral. They are generally offered for amounts of $500 or less at interest rates of 400% APR or more, depending on your state’s regulations.

These loans must be repaid in full during the borrower’s next pay period. Some states allow lenders to renew the loan if borrowers need more time.

Other types of short-term loans include:

  • Car title loans. Car title loans use your car title or “pink slip” as collateral for a short-term loan. Typically, you have 30 days to repay the loan in full; otherwise, the lender will take possession of your vehicle.
  • Pawnbrokers. These loans require the use of a valuable asset as collateral in exchange for a small portion of its resale value. If you are unable to repay the loan, the pawnbroker keeps your property.

Problems with short-term loans

Payday loans provide liquidity to nearly 12 millions Americans in Need and provides credit to 11% of Americans with no credit history. However, these loans can be devastating to someone’s finances for several reasons:

  • Payday loans allow lenders direct access to checking accounts. When payments are due, the lender automatically withdraws the payment from the borrower’s account. However, if the account balance is too low to cover the withdrawal, consumers will have to pay overdraft fees from their bank and additional fees from the payday lender.
  • Payday loans tend to be predatory. Getting a payday loan is easy. Borrowers only need to show ID, employment verification, and checking account information. Payday lenders don’t look at credit scores, which means they’re too often given to people who can’t afford to pay them back.
  • Payday loans tend to trap people in a cycle. People who are constantly strapped for cash can fall into a cycle of payday loans. When initial loans roll over to new, larger loans on the same fee schedule, borrowers run into trouble due to high interest and fees.
  • Payday loans are expensive. The interest and fees on payday loans are much, much higher than for installment loans or even credit cards.

Installment loans

Installment loans are a common type of loan. This is any type of loan where you make monthly payments, including car loans and mortgages. These loans can range from a few hundred dollars to $100,000 and can be secured or unsecured.

Installment loan payments are a fixed amount for a fixed term, usually a few years. Payday loans can have up to 400% interest rates, but the average personal loan interest rate is 10.40%.

Risks of installment loans

All types of borrowing carry risk, including installment loans:

  • Installment loans can come with fees. Origination, late and NSF fees can make the loan more expensive.
  • Installment loans can increase your debt. Getting into more debt is almost always risky. You need to make sure you can repay the loan so that it doesn’t cause long-term financial hardship. However, installment loans can reduce your debt if you get one for debt consolidation.

Other alternatives to short-term loans

If you need funds, there are alternatives to payday loans and installment loans. Here are some options:

  • Credit-generating loans. These loans are for borrowers with weak or no credit. The financial institution will deposit the loan funds into a locked savings account that you will only have access to after you have made all installment payments on the loan.
  • Alternative payday loans. Alternative payday loans, or PALs, are provided by credit unions to their members. These loans are for a small amount of less than $1,000 which are repaid over a month or a few months, depending on the institution.
  • Ask your employer for an advance. Some employers offer salary advances to their employees. Remember that if you advance part of your next paycheque, your next pay period will be reduced.
  • Negotiate a payment plan with creditors. Contact your creditors, whether it’s for hospital bills or a credit card bill, to explain your financial situation. They might be able to share payment plan options that you weren’t aware of.

At the end of the line

An expensive payday loan isn’t your only option for getting quick cash if you’re in financial trouble. You may also qualify for an installment loan with a more flexible repayment schedule and lower borrowing costs.

Although short-term loans often seem like the easiest solution to solve your financial problems, it is worth researching other options. You might find that one of these alternatives is the best for helping you get your finances back on track.


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