By definition an installment loan is a loan where borrowed money is received in a lump sum and then paid back over a pre-determined period of time according to a set schedule. More recently, installment loans have become known largely as a cousin of sorts to cash advance or payday loans. Both have found a niche in our economy since those with bad credit or who have filed for bankruptcy can still qualify providing they have some regular source of income (usually $750-$1000 per month) and a valid checking account. There is generally no credit check required and borrowers have their money in hand within 24 hours. While both payday and installment loans should be viewed as loans of last resort due to the high interest rates and fees associated with them, installment loans do offer some advantages over payday loans.
First, a little background on payday loans. These loans are know by several names…cash advances, check advance loans, post-dated check loans and delayed deposit loans are some of the other terms you may find associated with loans of this type. Basically, they work like this: the borrower writes a check to the lender, we’ll say for $115, and post-dates it for their next pay day. In exchange the borrower receives $100 immediately. When pay day arrives, the lender then cashes the $115 check and keeps the extra $15 as an interest payment. If the period of time between taking out the loan and repaying it on pay day was two weeks, the annual percentage rate (APR) on the loan would work out to be 391%.
What are the problems with payday loans? Obviously, the interest rates are extremely high; so high in fact that they are often flirting with maximum rate allowed under the law. Additionally, these loans typically must be paid back in full on the borrower’s next pay day. When the lender cashes the post-dated check, for example, the loan is being paid in full. If for some reason the borrower doesn’t have the funds available in their checking account for the post-dated check to clear, huge fees and penalties kick in.
Installment loans have begun to emerge as a solution to some of the problems associated with payday loans. While payday loans in effect require the loan to be paid in full on the borrower’s next pay day to avoid the exorbitant penalties and fees for late payment, installment loans are paid back over time in much smaller, scheduled payments. These payments are usually debited from the borrower’s checking account either once a week or once a month. The interest rates on installment loans, while still extremely high by most standards, are somewhat lower than most payday loans.
There are hopefully better alternatives available for most consumers who are in need of some type of cash advance or short-term loan, but when faced with the choice between payday or installment loans, installment loans may prove to be the safer, less-expensive alternative.