Payday loans and instalment loans are both types of high cost short term credit (HCSTC). They operate in similar ways and many short term credit lenders offer both loan options as part of their service, so that their customers have the maximum flexibility in how they would like to borrow. There is one key difference between payday loans and instalment loans which could affect how useful or beneficial they are to people who want to use them. This is an example of why it’s so important to weigh up all the pros and cons of different credit facilities before submitting any applications, because using a suitable loan could enhance your money management, whereas using an unsuitable loan could hinder it.

What is a payday Loan?

A payday loan is a small loan meant to tide you over until your next payday – hence the name! It’s a form of unsecured credit, which means you don’t need any type of collateral. In other words, you don’t need to have a car, a house, or an expensive asset in order to apply for the credit. Most payday loans can be obtained online with a quick and simple application, and you can usually get the money almost instantly if you are approved. Most payday loans last up to 31 days but you can usually select the exact borrowing period when you apply, and typically you would be required to make the repayment in one lump sum on your next payday.

What are the advantages of a payday loan?

  • The application usually takes less than 10 minutes
  • You get your loan decision straightaway thanks to automated loan assessment algorithms
  • Useful in managing short term cashflow issues, even if you have a poor credit history
  • You can repay the loan on your next payday, so the borrowing doesn’t last longer than necessary

What is an instalment loan?

“Instalment loan” is a term that can cover a range of credit facilities like car finance and mortgages. However, in the short term lending sector, instalment loans can help you manage unexpected or sudden expenses that would cause you major financial difficulty if you were unable to make the payments. Instalment loans, like payday loans, are unsecured credit facilities that you can find online. However, unlike payday loans, you repay an instalment loan over several months, rather than in one lump sum on your next payday. Typically, you can borrow an instalment loan for between 3 and 6 months, though some lenders may offer loans for up to 12 months.

What are the advantages of an instalment loan?

  • You can apply online any time of day, and the application form is quick to complete
  • Automated assessments mean you don’t have to wait hours for a lending decision
  • You can still apply if you have a low credit score
  • You can make monthly repayments, so your usual finances are not impacted too heavily

Should you use a payday loan or an instalment loan?

While both ways of borrowing can help you manage your cashflow, you should only consider taking out credit if you know you can afford the repayments. This includes checking for any upcoming one-off expenses. Whether intending to settle in full on your next payday, or spreading the repayments over a few months, repaying loans that you can’t afford will worsen any existing financial difficulty and likely make it harder to recover in the long run.

However, if you know you can afford the repayments, and you’ve used some online loan calculators to check how much it will cost, then both types of urgent cash loans have their advantages and the only way to choose between the two is by looking at your own circumstances and budget. If you need to borrow a large amount in an emergency and paying it all back on your next payday seems impossible, that’s where instalment loans could be advantageous over payday loans. You can spread your payments over a longer period of time, so it saves you the worry of potentially jeopardising your upcoming budget. Because each instalment is repaying only a portion of the amount you borrowed plus interest, it’s an easier way of managing your finances across the term of the agreement and you might be less likely to fall victim to unexpected costs that may prevent you from making you repayment.

On the other hand, instalment loans generally cost more than payday loans because you’re borrowing over a longer period. While the individual repayments will be smaller than a single payday loan repayment, the total amount payable will be larger. Therefore, if you know you can afford to repay the loan in full on your next payday, you shouldn’t take out an instalment loan with a loan term longer than necessary, as it will cost you more.

You should also consider that short term loans might not be suitable for your situation, depending on the reasons you need to borrow. There are alternatives to payday loans and instalment loans that you may find easier for your general money management, so when considering where to borrow money, always look around before applying, just in case there’s a more appropriate credit service elsewhere!