We’ve all experienced the panic and desperation of being unexpectedly laid off, faced with a sizable household expense, short on rent, or burdened with a medical emergency and not having enough money to cover the costs.
Some people are fortunate enough to have access to a variety of loan options to fill this financial gap; others don’t need to rely on payday loans. Learn more about a payday loan, what you are getting into, and whether it is an installment or revolving loan before taking one out.
What is an Installment Loan?
An installment loan is when you borrow a specific amount at once and pay it back over a specific amount of time, typically months or years. You will receive this loan in one lump sum. It will be repaid in monthly installments.
These loans have the benefit of lower interest rates and the freedom to customize the loan’s term to fit your spending plan. Sometimes they are secured loans requiring security, such as a car, but they can also be unsecured personal loans.
To be eligible for this type of loan, borrowers must pay an origination fee, and their credit will be checked with one of the major credit bureaus. Your rate and terms will be determined by your creditworthiness and payment history. When the loan’s principal is fully repaid, this account is closed. There are no prepayment penalties.
Examples of Installment Loans
There are various installment loan types, including mortgages, auto loans, student loans, and personal loans.
What is a Revolving Loan?
With a revolving loan, the account holder can borrow money repeatedly up to a predetermined limit while making monthly installment payments without applying for a new loan. Up to the maximum sum known as your credit limit, you may use these funds. A financial institution typically issues it. Due to your ability to repay and reborrow, it is a common flexible financing tool.
Examples of Revolving Loans
Credit cards, personal lines of credit, and a home equity line of credit (HELOC) are a few types of revolving loans.
What is a Payday Loan?
Payday loans are small, high-interest loans with short terms that can help you get by until your next paycheck. They’re unsecured loans, meaning no collateral is needed. These loans have extremely high annual percentage rates; the typical rate for a 14-day loan is 391%. The lender verifies your income and banking information instead of frequently checking your credit report. They need to be repaid on your next payday.
Is a Payday Loan Revolving or Installment?
Payday loans are neither revolving credit lines of credit nor installment loans. These are short-term cash loans. They have extremely high interest rates. Payday lenders usually target borrowers with bad credit. They typically need a check account’s payment authorization and are anticipated to be fully repaid from the borrower’s subsequent paycheck, typically within two weeks.
What Happens if I Can’t Repay a Payday Loan?
In the event that a payday loan is not repaid, costly compounding overdraft fees, aggressive collection calls, harm to one’s credit, a potential court summons, and even wage garnishment may result.
Don’t assume that because you only borrowed $300 that it won’t happen to you. There are some terrifying tales of people who have lost control of their cars as a result of payday loans.
They can sue you and garnish your wages if you live in a state where you are required by law to repay this loan, and you will lose. Before that occurs, you might want to look into other options for resolving the issue or speak with the lender about possible debt settlement options.
When negotiating with the lender, bring up filing for bankruptcy and use this as leverage. They will take you seriously if you use the word “bankruptcy” because they are aware that if you do, they won’t receive anything.
If you miss a payment on a payday loan, be aware of your consumer rights. To understand your rights as a borrower, review the Fair Debt Collection Practices Act of the Federal Trade Commission and your state laws. Some states permit bank levies and property seizures in addition to wage garnishment.
These people waste no time in trying to get money from you. Keep in mind that you granted them access to your bank account, and as a result, your bank will quickly be depleted by additional fees for each transaction involving insufficient funds.
You and the references you used to apply for the loan will receive threatening calls and letters from attorneys, and they will make an effort to find you. But remember that it’s against the law for them to threaten you with jail time. If they threatened to arrest you, you could get in touch with the attorney general’s office in your state.
If you receive a summons, do not ignore it. Show up and request payment proof from the lender. They frequently don’t arrive with any supporting documentation.
10 Better Alternatives to Payday Loans
Payday loans are problematic at best and frequently put borrowers in a worse situation than before they applied for the loan. Here are a few better options:
Peer-to-Peer Lending Sites
These websites link lenders who lend to qualified applicants directly with borrowers. These lenders are known as investors. Each website provides information on rates, conditions, different minimum and maximum loan amounts, listed borrower requirements, fixed interest rates, and a quick application process. Borrowers will have a fixed payment. Keep in mind that if your credit score is lower, your interest rates will be higher. Here are some of the top options:
Peerform is a peer-to-peer lending platform that matches borrowers with investors. Peerform offers unsecured loans with fixed APRs ranging from 5.99% to 29.99%. There is no application fee, and loans range from $4,000 up to $25,000.
Upstart is another peer-to-peer platform that’s best for borrowers with limited credit history. Upstart offers personal loans ranging from $1,000 to $50,000 over three- and five-year terms. Annual percentage rates range from 5.55% to 35.99%.
Prosper is best for borrowers with established credit history. They offer fixed-rate loans ranging from $2,000 to $40,000, repayable over three or five years. Annual percentage rates range from 7.95% to 35.99%, depending on the borrower’s credit history. Borrowers may be charged an origination fee ranging from 2.41% to 5.99%.
If you’re interested in learning more about peer-to-peer lending, keep reading to learn how it operates:
Get a Cash Advance from a Secured Credit Card
Your credit card company may offer a brief loan known as a secured credit card loan. You are taking out a cash advance against the available credit on your credit card, which is as easy as using an ATM.
Explore Payday Alternative Loans from a Credit Union
These loans, which cost much less than payday loans, are available from credit unions. You must be a member of the credit union for at least one month in order to qualify; the maximum APR is 28%; and the application fee cannot exceed $20. Loans up to $2000 are available, and repayment terms range from one to twelve months. Three loans at most can be obtained within a six-month period. Most only require the borrower’s income and ability to repay the loan, not good credit.
Download a Cash Advance App
If you have direct deposit and use cash advance apps, also known as paycheck advance apps, you can borrow money against your paycheck. They don’t charge any fees or interest payments. The lenders instead rely on “tips” and occasionally a small monthly fee Some of the wages that you have already worked but not been paid for can be withdrawn. There are some good options like Dave and Earnin, or you can read about our suggestions here.
Borrow Money From Friends or Family
Although navigating friends and family can be challenging, doing so enables you to avoid payday loans’ high interest rates. You must feel at ease with the idea of owing this person money and with the possibility of the relationship deteriorating if you don’t keep your end of the bargain.
Visit a Pawn Shop
No credit check is performed, and the item you pawned serves as collateral for the loan. They have interest rates ranging from 12% to 240% depending on the state, but if you don’t want to or are unable to repurchase it, you can walk away with no fees or blemishes on your credit.
Get Help from a Local Community Organization
Local community action organizations give money to struggling families and low-income families For the payment of bills, home repairs, emergency financial assistance, housing, car payments, and other expenses, they can provide interest-free or low-interest loans.
Get a Side Hustle
Driving for Uber or Lyft, making deliveries for Instacart or Amazon Flex, working as a freelance copywriter, graphic designer, or web developer, or anything else you can think of. The gig economy is vast.
Sell Unwanted Items Online
Online sales are a great way to both earn extra money and get rid of clutter in your life. Some options include Mercari, eBay, Craigslist and Facebook Marketplace.
Apply for a Home Equity Line of Credit (HELOC)
This is a revolving credit line that is secured by your home and uses a portion of the equity in your home to get cash. You can receive your funds in as little as 30-45 days, which is a vast improvement over the lengthy process you underwent to purchase your home. They typically have flexible repayment terms and a variable interest rate. Alternately, if you have a sizable amount of home equity and interest rates are low, it might be a good idea to think about refinancing your mortgage.
Payday loans are quick, convenient, and simple to get, but they come at a high cost.
When all other options have been exhausted and you are left with no other choice but to turn to a payday loan, do so only as a last resort. You don’t want a loan that helped you out of a desperate, panicked situation to leave you in a worse situation than when you first got into it.
If you repay the loan, these loans typically aren’t reported to the three major credit reporting agencies and won’t have a negative effect on your credit score. Additionally, if you apply for a payday loan, they will verify your income and banking information rather than running a credit check. Although you run the risk of damaging your credit rating for seven years if you decide to default on the loan and go to court and lose, and the type of credit score you have will determine your future eligibility for loans of other kinds.
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A much more aggressive and unpleasant debt collection agency may be used by the creditor to try and get payment from you. They can also sue you and deduct money from your paycheck, but they cannot be put in jail. A judgment will be filed if the lender prevails, and it may appear on your credit report. In most states, the debt itself doesn’t expire or go away until you pay it, in contrast to declaring bankruptcy, which removes the debt from your credit report after seven years. Visit the Fair Debt Collection Practices Act website of the Federal Trade Commission to learn more about your legal obligations as a borrower.
Even though it’s legal to have more than one loan, some lenders won’t let you obtain a second one. If you require another loan, you’ll probably have to find a different lender. This is not recommended. Keep in mind that the more loans you take out, the higher your interest rate will be and the harder it will be to avoid getting caught in the payday loan trap. Try using a cash advance app instead, or look into getting a small personal loan.
FAQ
Are payday loans the same as installment loans?
In contrast to installment loans, which give borrowers several months or even a few years to pay back the principal and interest, payday loans are typically repaid in one lump sum after about two weeks.
Is a payday loan installment loans or revolving?
Payday loans are neither revolving credit lines of credit nor installment loans. These are short-term cash loans. They have extremely high interest rates. Payday lenders usually target borrowers with bad credit.
What type of loan is a payday loan?
While there isn’t a single definition for a payday loan, they are typically high-cost, short-term loans of $500 or less that are typically due on your next paycheck. Payday loans may be obtained online or through payday lenders with physical locations, depending on the laws of your state.
What are 2 types of installment loans?
- Auto Loans. You can use auto loans to pay for a new or used car.
- Mortgages. A mortgage is taken out to purchase a home, and the home serves as security.
- Student Loans. …
- Personal Loans. …
- Buy-Now, Pay-Later Loans.