Difference Between Payday Loans and Installment Loans
- Kul Deep
- Updated June 10, 2025
Table of Contents
Loans have always been a part of us in difficult times. Whenever we face any financial emergency, we need cash on the spot to solve our financial problem. To get money, there might be several ways, but two of them are the most common and are misunderstood- payday loans and installment loans. Both seem similar from the name, but have a big difference in their operating point. They both can have a great impact, negatively or positively, on your credit score, repayment terms, or long-term financial health, which we will discuss later below. You can avoid putting yourself into a debt trap after understanding the differences between the two. Instead, you will be able to borrow in a way that will support your creditworthiness.
What is a Payday Loan?
Payday loans are a kind of short-term loan that is designed to help borrowers cover expenses until their next paycheck. These loans are generally small loans, between $100 to $1000, which come with extremely high interest, often exceeding 400% APR, and borrowers do not have much time to pay off it.
Key Features of Payday Loans
- No credit score or history is required.
- Loan approval is only based on income proof and an ID card.
- Repayment is required to be done in a lump sum, usually within 14 to 30 days.
- Loan payment is often disbursed by direct deposit within 24 hours.
Since payday loans are for those who want to solve their financial problem quickly, they might be considered as a good option, but if repayments are not made on time, they lead to rollover fees and form a dangerous debt cycle.
How does a Payday Loan Work?
As mentioned above, payday loans are short-term loans that come with high interest. They can be applied for online and are available at payday lending stores.
To get a payday loan, it is important to know the proper process:
Apply: To get a payday loan, the borrower is required to apply through a simple application process in which they need to provide all the necessary information, like their proof of income, regular income, or a valid bank account.
Loan Approval: Loan approval occurs in a short time, and funds are transferred within 24 hours to the provided bank account.
Loan Amount: The amount of the loan is generally between $100 to $1000, or according to the state regulations.
Repayments: Repayments and the interest rate are required to be made by their next payday check, which is generally within 14 to 30 days.
Pros of Payday Loans
- Quick approval and funded on the Same Day or within 24 hours.
- No credit check or history is required. The loan is provided based on the regular salary and some other documents.
- Due to fast approval, it is good for urgent needs like paying the bill, etc.
- It requires limited paperwork. The lender requires a government-issued ID and your recent salary slip.
FACT
Payday loans typically involve small amounts and are commonly used to cover essential expenses, such as rent or utility bills.
Cons of Payday Loans
- Payday loans often come with high APRs and fees, which make them extremely expensive to borrow as a loan option. This APR can go up 400% or more compared to the other loans.
- When they come with high APRs and fees, they are difficult to repay in a short time and lead to rolling over the debt, which proves a disaster for the borrower.
- A payday loan does not help the borrower to build their credit score; instead, it can hurt the credit score, because a payday lender does not provide information to the credit bureau about the credit history of the borrower.
FACT
Payday loans don’t build your credit score, but missed payments can damage it if sent to debt collectors.
Installment loans are long-term loans in which you can repay the borrowed amount plus interest in fixed monthly payments over a set term, which could range from a few months to several years.
How Does an Installment Loan Work?
As mentioned, an installment loan provides a lump-sum amount that can be repaid through structured and preplanned monthly repayments.
To get an installment loan, you can follow the following steps:
Apply: The first step to get an installment loan is to apply for it. Unlike payday loans, you will need to provide detailed information, which includes your income and proof of identity, and along with this, you will go through a credit check, which helps the lender assess your ability to repay the loan.
Approval: After applying, it will take a few hours for approval, but funding might take three to four days, though some lenders fund to the account on the same day.
Repayments: In installment Loans, terms are borrower-friendly, where loan repayments can be paid through easy monthly installments. These repayments can go for several months or years, depending on the loan amount and agreement.
Some Common Types of Installment Loans
- Personal finance
- Auto loans
- Medical loans
- Debt consolidation loans
Installment loans come with a soft credit pull or a full credit check before getting the amount. Before approving the loan, the lender or any financial institution evaluates your debt-to-income ratio, credit report, and payment history. Texo Finance in Texas “a good credit score can be maintained by making repayments on time and you can increase your chances to get approval for these sorts of loans easily”.
Key Features of Installment Loans
- Lower Interest Rates (Generally come with 6%-36% APR)
- Well-structured and Manageable Repayments
- Helps to build a Credit Score If Payments Are made on Time.
- The Loan Amount is Higher Than Payday loans (Between $1000-$50000)
Pros of Installment Loans
- Installment loans offer fixed monthly repayments because payments stay the same throughout the loan period.
- Installment loans offer lower interest rates and APRs as compared to payday loans.
- Installment loans help to build your credit score if repayments are made on time.
- As compared to payday loans, the borrower can apply for a higher loan amount.
Cons of Installment Loans
- Installment loans require a good credit score or history, because the loan approval depends on the borrower’s credit history and score as well.
- Installment loans offer loans for a long period, which generally can be from several months to several years, meaning the borrower is locked into monthly payments until they are fully repaid.
- Though installment loans have very low APRs or interest rates, they might still add up interest over the longer loan period.
Comparison Table For Payday Loans and Installment Loans
Features | Payday Loans | Installment Loans |
Loan Term | 14-30 Days | Months to Years |
Loan Amount | $100-$1000 | $1000-$50000 |
Repayment | Lump Sum | Monthly Payments |
APR | UP to 400% | From 7%-36% |
Credit Check | No | Yes, (Soft or Hard) |
Impact On Credit | Minimal or Negative | Build Credit If Repaid on Time |
Use Case | Emergency Bills | For Large or Planned Expenses |
Offered By | Payday Lenders (Online or Stores) | Banks, Credit Unions, and Online Lenders |
What are the Smart Alternatives to Payday Loans?
Sometimes, when you do not have an appropriate credit score to apply for traditional loans, you can try some other alternatives to payday loans.
Credit Union Loans
Credit Union offers small, short-term loans with low interest rates and flexible repayment terms. Some even provide payday alternative loans (PALs).
Borrow From a Friend or Family Member
You can ask for an interest-free loan from someone you trust can be a safe short-term solution, just be clear about repayment terms.
Credit Card Cash Advance
Though it comes with fees, it’s still cheaper than a payday loan, and more manageable if repaid quickly.
Use Cosigner
If you do not qualify for the traditional loans, you can ask a creditworthy friend or a family member to help you become eligible for a loan. As a cosigner, your friend or family member can take on the responsibility of the loan repayments.
By Now Pay Later
For purchases, BNPL services like Klarna let you split payments into manageable, interest-free installments.
When Should You Use Each Type of Loan
Payday Loans Might Suit When:
- You have no choice and need less than $500 quickly.
- You know you can pay it back on time.
- You’re dealing with a one-time crisis, like a utility shutoff or a medical bill.
Installment Loans Might Suit When:
- You require more funds for fixing your car, renovating your home, or paying off debts.
- You like having set monthly payments.
- You aim to enhance your financial habits and boost your credit score.
Which Loan is Safer For You, Payday or Installment
The Consumer Financial Protection Bureau (CFPB) enforces regulations to protect borrowers. Though some states in the United States do not allow payday loans, these loans are legal in many states, but come with high interest, and consumers are more vulnerable to predatory lending in these states. Payday loans are good only in situations when the consumer is aware of the lending process and the results of this loan.
Installment loans, by contrast, are often subject to tighter regulations and require lenders to disclose loan terms, fees, and repayment obligations upfront, which makes these loans more secure than payday loans, but it is hard to get when the borrower is unable to fulfill the criteria.
Bottom Lines
Payday loans can be valuable only if you fully understand their terms and process. If you’re unaware of the details, you should avoid these loans, as they often come with traps, including extremely high interest rates, that can lead to a cycle of debt. Over time, this can turn into bad debt, making it very difficult to escape financially. You can choose other alternatives to the payday loans.
Installment loans are a structured and safer way to borrow. These help you improve your credit score, especially when you borrow from licensed lenders, because they require your credit report, which is examined by the credit bureaus ahead. So, choosing between both loans is the choice of the borrower, as per the situation or other factors, but keeping the loan terms and conditions in mind properly can help them to choose wisely.
Frequently Asked Questions
Why Do People Use Payday Lenders?
Payday lending is an easy and fast financial tool for borrowing money to cover sudden, unexpected financial problems. These lenders do not require a credit check and require only regular employment and identity proof.
What Are The Other Names Of Payday Loans?
Payday Loans are also called cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans.
Is a Payday Loan Fixed?
Yes, payday loans have a fixed interest rate throughout the loan term. As these loans are short-term loans with a small amount, which fall between $100 to $1000, and also do not provide a long-term repayment plan. So, for a short-term loan, a fixed interest rate is charged.
