When you need money quickly, there are several different ways to borrow it. Personal loans and payday loans are two common options, but they both work very differently.
The biggest difference is how you repay the money.
A personal installment loan typically gives you a set amount of money that you repay through scheduled payments over an established period. A payday loan generally requires repayment much sooner, often around your next payday–hence the name.
Those differences can affect your payment size, borrowing costs, budget, and what happens if you can't repay the loan when it's due.
Understanding how each option works can help you make a more informed decision before you borrow.
A personal loan provides money for personal expenses rather than a specific purchase such as a home.
With a personal installment loan, the lender approves you for a specific amount. You receive the funds and then repay what you owe with scheduled payments over a defined loan term.
Before accepting the loan, you should receive information about important details such as:
How much you're borrowing
Your interest rate or finance charges
Your payment amount
When payments are due
How long you have to repay the loan
Any applicable fees or early payment charges
Many installment loans use fixed payments. That structure can make repayment easier to plan for because you know what you'll owe each month.
A payday loan is a short-term loan that's generally designed to cover an immediate cash need until your next payday or another near-term date.
Instead of dividing repayment across a longer series of monthly payments, payday loans typically require you to repay the amount borrowed plus applicable fees within a much shorter period.
That short repayment window represents one of the biggest differences between payday loans and personal installment loans.
For example, repaying several hundred dollars at once can affect your budget very differently than spreading repayment across multiple scheduled payments.
Although both options let you borrow money for personal expenses, they use very different repayment structures.
Personal installment loans spread repayment over a number of months or years, so you can treat repaying your loan like paying your bills.
Payday loans generally have much shorter repayment periods and may require the full amount plus fees to come due at once.
Payment Size
Because installment loans spread repayment over time, each individual payment is only part of your total balance. Each monthly payment
A payday loan requires that you pay the entire amount–or close to it–all at once.
Cost of Borrowing
Compare more than the amount you receive.
Look at the annual percentage rate (APR), finance charges, fees, and total amount you'll repay. APR can make it easier to compare borrowing options with different fee and interest structures.
A loan that provides quick access to cash can still become expensive depending on its terms. This is especially true for payday loans, which require a flat fee that can frequently be as much as 400% APR.
Loan Term
Personal installment loans typically give borrowers more time to repay. 6-month and 1-year repayment plans are common.
Payday loans operate on much shorter timelines. Depending on the loan and applicable state law, repayment may come due within weeks rather than months.
Credit Requirements
Requirements vary among lenders.
Some personal lenders consider your credit history alongside factors such as your income, existing obligations, and ability to repay.
Payday lenders may use different qualification standards. Easier qualification, however, doesn't necessarily mean a loan offers better terms.
When comparing loans, don't focus only on whether you can get approved.
Ask whether you can comfortably repay what you borrow.
Suppose an unexpected car repair costs several hundred dollars. A loan that requires you to repay most or all of that amount from your next paycheck could leave less money available for rent, groceries, utilities, and other expenses.
An installment loan spreads repayment over time. You'll still need enough room in your budget for every scheduled payment, but you won't typically face the entire repayment obligation at once.
Before accepting either type of loan, look at what each payment will do to your actual household budget.
This is an important question to ask before borrowing.
Depending on the lender, loan agreement, and laws where you live, failing to repay a payday loan when it's due may lead to additional fees or other consequences.
Some borrowers may also find themselves considering another loan or an extension because they can't afford the original repayment. Repeated borrowing can substantially increase the overall cost.
If you think you'll have difficulty making any loan payment, contact your lender as soon as possible to discuss your situation and available options.
Personal loans can be either secured or unsecured.
Secured Personal Loans
A secured loan requires collateral.
Collateral is property that helps secure the debt. Depending on the type of loan, that could include a vehicle, savings account, or another asset.
If you fail to repay a secured loan according to its terms, the lender may have the right to take the collateral.
Unsecured Personal Loans
An unsecured personal loan doesn't require you to pledge property as collateral.
Instead, the lender determines whether you qualify based on its lending requirements, which may include your income, credit history, existing financial obligations, and ability to repay.
Because requirements and terms vary among lenders, always confirm whether a loan requires collateral before accepting it.
There's another distinction worth understanding: installment credit versus revolving credit.
A personal installment loan gives you a specific amount of money and a repayment schedule. As you make payments, you gradually pay down the balance until you finish repaying the loan.
A credit card works differently.
Credit cards provide revolving credit. You receive a credit limit and can generally continue borrowing against the available portion of that limit. As you repay your balance, that credit becomes available to use again.
With an installment loan
You borrow a specific amount.
You follow an established repayment schedule.
The loan ends after you repay what you owe.
With revolving credit
You have an available credit limit.
You can borrow, repay, and borrow again.
Your balance and required payment can change depending on how you use the account.
Neither structure automatically makes one form of credit right for every situation. The important thing is understanding what you're agreeing to and how repayment fits your budget.
They can, but the effect depends on the lender and the loan.
When you apply for a personal loan, the lender may review your credit. A hard credit inquiry can temporarily affect your credit score, while a soft inquiry generally does not.
After you take out a loan, payment activity may also affect your credit if the lender reports the account to credit bureaus.
Making payments as agreed can contribute positively to your payment history. Late or missed payments can hurt your credit if the lender reports them.
Payday lenders don't all follow the same credit-reporting practices. However, an unpaid debt may eventually reach a collection agency, which can create additional financial and credit consequences.
Before applying, ask the lender whether it checks your credit and whether it reports payment activity to credit bureaus.
Don't choose a loan based solely on how quickly you can receive the money.
Take a few minutes to understand the entire agreement.
Before accepting a loan, find out:
The amount of money you'll actually receive
The APR for your loan
Any additional fees or finance charges
The amount of each payment
How often you'll make payments
When your first payment is due
The total amount you'll repay over the life of the loan
Whether the lender requires collateral
Whether you can repay the loan early without a penalty
What happens if I miss a payment?
Will the lender report my payments to credit bureaus?
A reputable lender should clearly explain your loan terms before asking you to accept them.
Needing quick cash can create a sense of urgency, but borrowing deserves careful consideration.
Look beyond how quickly you can get approved. Consider how repayment will affect the weeks and months that follow.
A personal installment loan may make sense when you need to cover an expense now and want to repay what you borrow through predictable payments over time. Other forms of credit may make more sense in other circumstances.
Whatever you choose, understand the costs, read the agreement, and make sure the payments fit your budget before you sign.
The goal isn't simply to get the money you need today. It's to choose a repayment plan you can realistically manage tomorrow.
No. A personal installment loan typically lets you repay what you borrow through scheduled payments over a set period. Payday loans generally use much shorter repayment periods and may require repayment in full around your next payday.
The right choice depends on your financial circumstances and the specific loan terms. Compare the APR, fees, repayment schedule, total cost, and payment amount before borrowing.
Not always. Some personal loans are secured and require collateral, while unsecured personal loans do not require you to pledge property.
No. Credit cards generally provide revolving credit. An installment loan provides a specific amount that you repay according to an established schedule.
It depends on the type of credit inquiry the lender uses. A hard inquiry may temporarily affect your credit score, while a soft inquiry generally does not. Ask the lender how it checks your credit before applying.
