Choosing between payday loans and installment loans

Payday loans or Installment loans.

Some financial institutions claim that payday loans are predatory whereas installment loans are ideal for an American who finds himself in a difficult financial situation. The plot of this statement is that payday loans have a high interest rate. Whereas interest charge of installment loans charge is smaller. The annual interest rate for Installment loans is up to 200%, and payday loans up to 400%. And if you rely only on such a calculation, then the choice is obvious. After all, double superiority is an advantage. Let's now add to the calculation such an argument as the loan repayment term, and replace the interest rate with real money.

  • installment loans:

    If the borrower takes a loan of $ 1,000 for about 8 months. The amount of loan repayment will be about $ 1,400. That is, the borrower, in addition to principal, paid $ 400 as a percentage of the lender.
  • payday loans:

    The borrower takes a loan of $ 1,000 for two weeks until the next paycheck. The amount of repayment of a short-term loan will be about $ 1,150 if the interest rate is a little more than 1 percent per day or about 400% per year. So the borrower pays an extra $ 150 over principal.

Based on these calculations, we could conclude:
Despite the higher interest rate, the cost of payday loans to the borrower will be less than the cost of installments loans.

If you consider that this is an advantage, then payday loans are better than installment loans. But is such a situation real when the cost of a loan is the main criterion for choosing a loan? To do this, you need to know other lending options such as loan repayment periods, repayment schedule. Is the installment of a loan important to the borrower?

Suppose an American has a stable income in the range of $ 50,000, but has no savings after certain significant expenses. Suddenly, an emergency financial situation arises that requires an extra $ 1,000. Two weeks later, he has the next salary, but he can't wait. He decides to take a loan. Obviously, he does not need installments and the cost of a loan for him can be a decisive factor. Therefore, the most rational solution in this case is payday loans.

Another thing is when a person has small monthly savings and a lump sum payment of more than $ 500 does not fit into your personal budget. In this case, payday loans are really very dangerous financial instruments. After all, as a rule, because of the delay in repaying the loan, you are obliged to make penalty payments. and get a low credit rating. So you can fall into a credit trap and find out what bad credit loans are. Therefore, if you are not able to repay the loan with the next salary, then you should consider the option of installment loans. Instead of a one-time payment, the borrower has a payment schedule. That is, one large payment is divided into a number of small payments that are paid within 2 to 36 months. Moreover, installment loans can be ranked from one to several thousand dollars. These are the arguments that motivate you to take an installment loan.

So, if you are sure that you can pay about a thousand dollars from your next salary, then payday loans will be your rational choice. If there is no such certainty, consider a medium-term loan with a payment schedule.