What’s the Difference Between a Payday Loan and an Installment Loan?

Loans are, perhaps, already a part of American culture. On credit, you can buy everything from new shoes to houses. This is convenient and helps you get what you need now and pay for it later.

Their abundance can make you feel dizzy when it comes to loan offers. Choose what you need: maybe a mortgage? Or a personal loan? Guaranteed installment loans for bad credit? Often there are questions like, what’s the difference between a payday loan and an installment loan? What should I choose: a home equity loan or a line of credit? There are really a huge number of offers on the credit market. But the abundance of loan offers is a blessing and a curse. Among the many loans, it is easy to get lost, choose unsuitable for your needs, and lose money on too high interest rates.

To borrow money correctly and profitably, you need to understand the difference between loan offers. And at first glance, it may be difficult, but in fact, it is not. Each loan offer is unique, has its own specifics, and differs in possible loan amounts, terms, and conditions.

Payday loans

A payday loan is an unsecured loan, which means it doesn’t need any collateral. It’s a short term loan, you can apply online, and it’s quick cash.

Payday loan terms are usually the same as the American payroll itself – 14 days. The maximum loan amount is $1,000, and you can get the entire loan on the same business day or the next day. Then payday lenders receive payment on the loan on your next payday – hence the name. If you are wondering, “payday loan is variable or fixed,” the answer is fixed.

Payday loans are usually used for emergency expenses as many other short term loans. You can have a loan amount to your bank account sometimes on the same day. So it can help with your financial needs.

An essential component of payday loans’ popularity is that they can be taken even with bad credit history. Lenders don’t check your credit report; they ignore credit bureaus. So the borrowers can have a low credit score and get the loan anyway.

How do payday loans work?

A payday loan looks pretty simple: you choose a lender, get your cash, and make your one lump sum payment from your next paycheck. But there is a reason why some people are wary of payday loans. And the reason is high interest rates. The annual percentage rate for payday loans is 146 percent, which can sometimes reach 700 percent. This is not obvious because borrowers can get a small amount, but interest rates are incredibly high.

Furthermore, payday loans tend to trap people in a debt cycle. And high interest rates are a price for getting a loan without credit checks. Nevertheless, payday loans are still affordable because the loan amount is not as big as when you get a personal loan, for example.

What happens if I can’t repay a payday loan on time?

If you cannot repay your debt on time, the lender can offer you two options: rollover and a payment plan. Either option will require you to pay more money.

  • A rollover means borrowers pay a fee for extending the due loan date.
  • A payment plan allows spreading the payments over a more extended period.

If you haven’t contacted the lender and asked for a rollover or payment plan, then the lender will start acting on their own to get their money. The money will be automatically withdrawn from your account if you provide access to it. If there is not enough money in the account, the lender will break the payment into smaller amounts and extract them every time you have money. If there is no money in the account or you did not provide access to it, then collection agencies will interfere. However, a prison for non-payment of the debt does not threaten you.

Anyway, the best solution is to repay the loan on time or notify your lender that you cannot do it. Then use a rollover or payment plan.

Installment loans

Roughly speaking, the term installment loan includes all loans repaid in several installments. So car loans, personal loans, and even mortgages are installment loans.

When you take out an installment loan, you receive the loan amount, and then you pay monthly payments with interest rates. Installment loans are issued by banks, credit unions, private lenders, and other financial institutions.

How do installment loans work?

With an installment loan, you can get more than $1,000 in loan amounts, and interest rates can differ. Installment loans are highly dependent on your credit score. The higher borrower’s score, the higher the loan amounts and the lower APR.

Credit scores matter, but not everywhere. Borrowers can find lenders who can apply for guaranteed installment loans for bad credit scores.

Secured and unsecured installment loans: what’s the difference?

couple sitting at the table filling financial documents

Installment loans are both unsecured and secured.

Secured loans mean that you need to provide collateral. For example, if you choose a mortgage, the house will be your collateral. For a title loan, the collateral is a car. Some secured loans have lower interest rates, like home equity loans. Others, like pawn shop loans, can be quite expensive because of short loan terms and higher interest rates.

An unsecured loan doesn’t require collateral. More often, these loans require a more detailed examination of your financial condition, including a credit check. But usually does not mean always. There are a lot of installment loans that don’t need a credit check, for example, title loans, some personal installment loans, and so on. Everything depends on the lender you choose.

What happens if I can’t repay an installment loan on time?

It all depends on the type of installment loan you have chosen.

Speaking of the personal installment loan, the first thirty days of its delay are likely to be preferential. If you are 30 to 60 days late on your debt payment, your credit score will take a hit, and you will be penalized. A further credit rating downgrade will follow this. After 90 days of completion of delay in payment, the creditor will sue.

If we are talking about secured loans, then in case of non-payment, the borrower may lose collateral – a house, car, or any other thing that is provided as collateral.

Installment loan vs. payday loan: what’s the difference?

The main differences between an installment loan and a payday loan for borrowers are loan amounts, loan terms, APR, and credit checks.

Loan amounts

The amount you can borrow using a payday loan – is a maximum of $1,000. However, the amount you can get with the installment loan just begins from $1,000 and could be huge as you get a mortgage.

Loan terms

As a short term loan, a payday loan should be repaid in one week, two weeks, or a month. It depends on your loan agreement. Your funds will be withdrawn on your next payday.

An installment loan, like a personal installment loan, usually has long terms. So you could spend 12 to 60 months repaying your debt.


Both loans have fixed rates. But you’ll pay much more interest for payday loans. The average APR on a payday loan is 375%. The APR on a personal installment loan – 3%to 36%.

Credit check

Usually, getting a payday loan is much easier; lenders do not conduct hard credit report checks. But some lenders can also offer installment loans without hard credit checks.


Which is better: a payday loan or an installment loan?

It all depends on the purpose for which you take a loan, how much cash you need, and a bunch of other factors. Key differences include loan amounts, terms, APR, and credit checks.

Is it a payday loan installment or revolving?

None of this. You need to repay the payday loan in one payment with your next paycheck. If you can’t repay the loan on time, you could ask a lender for a rollover or payment plan. But it’s not revolving or installment.

Which loan is easier to get with bad credit: payday vs. installment loans?

You can try to get both. But a payday loan will be easier to apply for. Nevertheless, installment loans (title car loans, for example) could also be available for borrowers with bad credit. You can even get a personal loan, but APR will be high, so you’ll need to pay more.

Bottom Line

Now that you’re wondering, “what’s the difference between a payday loan and an installment loan?” you’ll know the answer. The key difference between these two loans is their terms. A payday loan usually needs to be repaid in a lump sum after 14 days or a month. An installment loan involves a series of monthly payments, and the loan repayment term is longer. There is also a difference in the amount of the loans. A payday loan is usually less than $1,000, while an installment loan offers amounts over $1,000.