Payday Loan vs. Installment Loan: What’s the Difference?
Written by
Sarah Silbert
Edited by
Melanie Grafil
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Payday loans and installment loans are both personal loans available through a variety of lenders.
A payday loan is typically for a small amount, less than $1,000, comes with incredibly high interest rates, and must be repaid by your next payday.
An installment loan is different because you can generally get a much larger amount of money, and it’s paid back over time across several payments, with a more reasonable interest rate.
Differences Between a Payday Loan and an Installment LoanÂ
Funds Received
Payday Loans
If you’re approved for a payday loan, the lender will either write you a check or deposit the money into your bank account. Payday loans are always for relatively low amounts, generally topping out at $500, though the exact limit will depend on your state.
Installment Loans
Similarly, you’ll get all your requested money up front with an installment loan. The difference is that installment loans can be for much higher amounts, such as up to hundreds of thousands of dollars.
A mortgage, for instance, is a type of installment loan, but installment loans can also be used like a regular personal loan to fund a project or pay off debt.
Interest Type
Payday Loans
Payday loans are known for charging prohibitively high interest rates. According to the Consumer Financial Protection Bureau, the typical APR for a payday loan is nearly 400%.
Installment Loans
With an installment loan, you’ll pay a fixed interest rate, but it will generally be much more reasonable. The exact interest rate you’ll pay will depend on the type of installment loan you take out.
Options include:
- Mortgage
- Student loan
- Auto loan
- Personal loan
- Buy now, pay later loan
- Credit
Did You Know?
The average personal loan interest rate is about 11.66%, according to the Federal Reserve Bank of St. Louis (FRED), though your exact APR could be higher or lower.
Collateral Required?
Payday Loans
Payday loans are a type of unsecured debt, meaning you aren’t required to provide any collateral when you take one out. Instead, you agree to pay back the loan amount, plus additional fees and a high interest rate.
Installment Loans
Some installment loans do require collateral, such as mortgages, auto loans and pawn shop loans.
With these loans, if you fail to repar your car, for example, it could be repossessed to pay off the debt.
Not all installment loans are secured, though — personal loans and student loans don’t require collateral.
Who Are Payday Loans and Installment Loans Best For?
Payday Loans
Payday loans have far from ideal terms, with exorbitantly high interest rates. They should be considered a last-resort option for those who aren’t able to qualify for other types of loans and who need a small amount of money — say, a few hundred dollars — in a pinch.
Installment Loans
An installment loan is best if you’re looking to buy a home by taking out a mortgage, if you need to finance a car purchase, or if you’re taking out student loans. For big, milestone expenses like these, it’s common to need a loan, and you can qualify for a reasonable interest rate if you have a solid credit score.
Credit Needed
Payday Loans
With a payday loan, a credit check generally isn’t required. This can make it easier to get money if you’re new to credit or your score needs improvement, but the tradeoff is that you’ll pay an extremely high APR for the privilege of borrowing money.
Installment Loans
As there are multiple types of installment loans, there isn’t one universal requirement. Unlike with payday loans, however, you’ll typically need a to meet a minimum score minimum, which is generally at least 580.
Common Uses
Payday Loans
The most common reason to get a payday loan is for unexpected expenses, such as a medical bill or another emergency.
Since payday loans are limited to smaller sums of money, a borrower might be looking for a few hundred dollars and generally doesn’t have other options, since avoiding payday loans’ high APRs is the best way to go whenever possible.
Installment Loans
There are many uses for installment loans, from buying a home with a mortgage and paying it off over time to financing a car to paying for a large, unexpected expense like medical debt or another emergency.
What Is a Payday Loan?
A payday loan is a personal loan for a small amount — up to $500 — and needs to be paid back relatively quickly, usually in 14 days or by your next payday. Payday loans are available both online and at brick-and-mortar through lenders that typically specialize in this loan type.
With a payday loan, you’re able to get cash quickly, without a credit check. You generally just need an ID, a bank account and proof of income to qualify.
While getting approved for a payday loan is easy, there are significant downsides. The biggest is that payday loans charge extremely high interest rates, in the triple digits. This means that if you take out a payday loan for $500, you could end up owing the lender as much as $2,000, plus any additional fees, if your APR is 400%, which isn’t unheard of.
What Is an Installment Loan?
An installment loan refers to any loan that you pay back over time in regular, fixed payments. Mortgages, auto loans, student loans, and most personal loans are installment loans.
Unlike payday loans, which are limited to a few hundred dollars and are generally only available through payday lenders, installment loans are available through a wide variety of lenders online and in person. You can get installment loans through banks, credit unions and online-only options like LightStream or Upgrade.
Installment loans have more stringent qualification requirements than payday loans. You’ll generally need a fair credit score, or a FICO score of at least 580, to qualify for a personal installment loan. While installment loans aren’t as easy to qualify for as payday loans, the upside is that you’ll get a much lower interest rate, in the double or single figures as opposed to triple figures. The better your credit score, the lower your APR will be.
Pros and Cons of Payday Loans vs. Installment Loans
| Pros | Cons |
|---|---|
| Easy to get: Easier to qualify if you have little to no credit history | Extremely high interest rates: Interest rates can be high — as much as 400%, which makes the total cost to borrow much higher than your initial loan. |
| Quick funding: Funds are often available same-day or the next business day | Short loan term: You’ll generally need to repay the loan, plus interest and fees, within 14 days or by your next payday. |
| Unsecured: No collateral required, which means you don’t need to leverage your assets to borrow | Extra fees and potential to take on more debt: Lenders may charge fees — an average of $10 to $30 for every $100 you borrow, according to the CFPB. If you don’t pay on time, there’s a potential to fall into a cycle of debt. |
| Doesn’t help your credit score: Making on-time payments generally don’t have a positive impact on your credit score. However, late payments do and can be reported to collections, which damages your score. |
Installment Loan Pros and Cons
| Pros | Cons |
|---|---|
| Can help you finance big purchases: You can buy a home or a car and pay down the loan over time. | Not everyone can qualify: Those without established credit or those whose credit needs repair may not be able to get one. |
| Good interest rates available based on your credit: Making payments on time gets reported to credit bureaus, which helps your credit score. | Can damage your credit if you can’t repay: You’ll need to have a solid plan and a budget to pay back your installment loan, because any missed payments will be reported to the credit bureaus and can negatively affect your credit score. |
| Flexible loan terms: You can choose between different repayment schedules, so you can find the one that matches your budget. | Extra fees are common: If you have bad credit, you may only be eligible for a high interest rate. Extra fees, like origination or late fees, are common. |
| Better interest rates: Interest rates are reasonable compared to higher-coast loans. If you have good credit, you’ll have access to better rates overall. |
How To Choose the Right Option for You
So, how do you decide between a payday loan vs. an installment loan? Here’s a cheat sheet for various situations.
| If You… | Go With… |
|---|---|
| Want a fixed monthly payment and a clear end date | Installment loan |
| Need money fast and your credit is in bad shape | Payday loan |
| Have a decent credit score | Installment loan |
| Need to borrow more than a few hundred dollars | Installment loan |
| Only need to borrow a few hundred dollars and don’t have any other options | Payday loan |
How To Apply for a Payday Loan or an Installment Loan
Credit Score Requirements
Payday Loans
There’s no credit check or minimum credit score requirement for payday loans, which means they’re easier to get, but there’s a huge tradeoff. You’ll pay an incredibly steep interest rate to borrow money, which can triple or quadruple the amount of money you owe.
Installment Loans
You’ll generally need a credit score of at least 580 to qualify for an installment loan. The higher your score, the more favorable your loan terms, so applying with a good or excellent score is your best bet for securing the lowest interest rate.
Documents Needed
Payday Loans
You typically need to provide an ID, proof of a bank account in good standing, and proof of a job or regular income.
Installment Loans
Like with payday loans, you’ll generally need to provide your ID, along with proof of a bank account and income. You’ll also need to undergo a credit check to verify that you meet the loan’s requirements for approval.
Where To Apply
Payday Loans
You can apply either online or in-person at a payday lender. You generally won’t find payday loans through banks or credit unions; these are more specialized lenders and there are often brick-and-mortar locations that specialize in offering this particular type of loan.
Installment Loans
You have many options for applying for an installment loan, but you can typically find them at both major and regional banks as well as credit unions and through online-only lenders. Some lenders specialize in specific types of installment loans, such as Rocket Mortgage for mortgages and Ascent for student loans.
How Long It Takes
Payday Loans
You can get approved for a payday loan as quickly as the same day or the next business day.
Installment Loans
Installment loans generally take a bit longer for funding to go through, but it depends on the specific type of loan you’re considering. Mortgage loans can take longer than a month to be approved, while simple personal loans can be as fast as the same or next day, though on average take three days to a week for funds to be received.
Tips for Getting Approved
Payday Loans
Payday loans are among the easiest loans to get approved for, but they carry steep interest rates and should be avoided at all costs.
If your credit score is low, you may still be able to qualify for an installment loan through a credit union, as these institutions are more likely to take your overall financial picture into account than banks.
You can also consider a credit card for low credit scores or even asking family or friends for financial assistance.
While they have their own downsides, all of these options are preferable to payday loans as they avoid the predatory three-figure interest rates and other cost-prohibitive fees that can trap you in a cycle of debt.
Installment loans
Before applying, review your credit report to check for any errors and check your credit score to make sure you meet lenders’ requirements.
If there are any inaccuracies on your report, reach out to the credit bureau and the creditor in question to resolve the situation and provide proof to support your case if needed.
FAQs About Payday Loans and Installment Loans
Trying to figure out the what's best -- payday loan vs. installment loan? Here's a look at some frequently asked questions and answers.- Which one is easier to get?
- Payday loans are easier to get because they have no credit score requirements, but the tradeoff is that you'll pay interest rates as high as 400% and you'll need to repay the loan by your next payday. Installment loans have much more favorable terms and should be your first choice if you're searching for a personal loan.
- Which one has lower interest rates?
- Installment loans have much lower interest rates, averaging about 11.66% for a general personal loan. Your rate could be lower or higher depending on the type of loan you're looking for and your credit score. The higher your score, the lower your rate will generally be.
- Can I use either for paying off debt?
- Yes, you can use both payday loans and installment loans for a variety of purposes, including paying off debt or covering an unexpected expense.
- How do they affect credit score?
- Failing to pay back either a payday loan or an installment loan will negatively affect your credit score. If you don't pay back a payday loan, the lender will report it to collections, which can damage your credit. If you don't pay back an installment loan, the lender will report the missed payment to three credit bureaus and your score will be impacted.
- Can I switch from one to the other later?
- You can switch from a payday loan to an installment loan or vice versa, but that would require separate loan applications. You should avoid payday lenders at all costs and explore other options if your credit score isn't high enough to qualify for an installment loan.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- Consumer Financial Protection Bureau (CFPB). "What is a payday loan?"
- FRED. "Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan."
