Instalment loans were first introduced to bridge the gap between payday loans and credit cards. They’ve done this by offering small amounts of cash (similar to a payday loan) that is repayable in instalments as opposed to in one lump sum.
Despite all of this, many are still comparing payday loans to instalment loans. On paper the products may look relatively similar, but when you scratch beneath the surface they are in fact very different. Throughout this article we are going pit the two products against each other and reveal how they differ.
The amount offered
The instalment loan market is very diverse and the amount offered differs from lender to lender, generally speaking though lenders will offer between £100 and £2000. The amount offered by payday loans also differs between lenders however typically they will offer between £20 and £500.
The repayment terms
As you’d expect from the title, instalment loans are designed to be repaid in either weekly or monthly instalments. The loan term available will depend on the amount borrowed however generally lenders will allow you to repay the loan over a term of 1 to 24 months.
Payday loans on the other hand are designed to be repaid in full at the borrowers next payday. There are no instalments, you simply payback your loan in one lump sum.
Again, each lender will offer a slightly different rate with some instalment loan lenders hovering around the 200% APR and others being nearer 1000%. Despite this, instalment loans are still seen as a cheaper alternative to payday loans. This is because the rate of payday loans ranges from 1500% and 5000% APR, however this is soon set to be capped according to recent news stories.
The approval time
Payday lenders will pride themselves on their ability to pay a loan out within an hour of the application being made. They are able to do this because all of the eligibility checks involved in the process will be automated meaning there is no paperwork involved.
Instalment lenders will also offer a quick turnaround time, however due to the fact that they are often lending slightly larger amounts – there will be a few more eligibility checks involved. It is likely that there will be both a credit check and an affordability check simply to assess the applicant’s repayment ability. Providing everything goes through smoothly, an instalment loan can still be paid out within a few hours of applying.
Whilst payday loans certainly have their place in the loan market, it shouldn’t be forgotten that they are a last resort and not a first port of call to financial problems. In essence, they are a short-term fix and if you’re looking for a more long-term solution then I’d recommend looking elsewhere.