In our tough economy, it is rough for many families now. You may have emptied your emergency savings account and now are at the painful truth of having no other accessible cash. Having bills pile up may lead you to think that your only option out is to take out a payday loan. However, a small installment loan is the better way of covering your financial debt to help you come back out on top.
It’s important to understand that there is a difference between a payday loan and an installment loan. Do not get the two confused. Yes, they both are loans and must be paid back. However, there are key differences in interest, repayment term and loan amount.
An installment loan can do everything a payday loan can do but better. It is not only cheaper, but it can also provide a longer repayment period making payments more affordable. Installment loans are also often much larger which means you can cover a larger expense. For example, an installment loan can help you:
A payday loan seems rather simple. You go into a payday loan store, request a loan for the amount you need, and you write them a cheque. You are to have a regular source of income and they will cash your check or electronically withdraw it on your next payday. Now, let’s discuss this check or automatic withdrawal process.
You are taking out a loan that must be paid back with interest. However, you need to realize that payday loans charge annual interest rates of 400 percent and higher. Therefore, when you look at it compounded daily, a $100 payday loan paid back within 15 days is approximately $115. You may think that’s not bad, but let’s look at the bigger picture.
First, most people are not going to walk into a payday loan store to borrow $100. This is rare. Second, most people are unable to pay their loan in full by the next cycle. In fact, the average payday loan is not paid in full until about 155 days.
The reason this loan turns from a short-term loan into a long-term loan is due to various reasons. One prime reason is the person is not able to afford paying the loan. This loan may have been only a temporary fix. Their debt situation still exists. If the money is not in the account, they are now faced with a bounced cheque. Not only do they owe the payday loan lender, they now owe their bank excessive overdraft fees. At this point, they have joined the payday loan trap.
You have another situation now where you need to cover your other outstanding bills, your payday loan, and cover your bank’s fees. Your only viable option is to take another payday loan. So there you have it. You are taking a payday loan to pay for your first payday loan. So now that that is mapped out for you, let’s discuss an installment loan.
An installment loan is different and much simpler. You do need to go through an application process for an installment loan; however, you are looking at a much lower interest rate. There are no hidden fees and you know exactly what to expect to pay monthly before taking the loan out. You have an extended amount of time to pay your loan in full. You may qualify for much more financing with personal loans, meaning you have more options to consolidate your debt, pay medical bills, and have a cushion should an emergency arise.
As you can see, a payday loan is a quick method of obtaining cash. However, it may not meet your financial needs. If you need to cover rent, utilities, and extra gas money, you may find yourself taking multiple payday loans to cover the expenses. An installment loan has a lower interest rate, you are able to cover all your expenses, and as long as you have made your payments, your term will end on the contract end date.
| Pros | Cons |
| An installment loan allows you to choose a repayment period and even repayment frequency (monthly, weekly, bi-weekly) that suits your financial situation. | You can often get approved for larger amounts with an installment loan. Though that can be a positive factor, it also means you will be adding a larger amount of debt you must repay. |
| Interest rates are lower than payday loans. | Similar to a payday loan, some installment loans charge origination fees and additional fees. |
| Many alternative lenders that provide installment loans accept a wide variety of borrowers. As such, even those with bad credit are eligible. |
If you are facing a financial emergency, don’t get caught in the payday loan trap. Contact Loans Canada so they may help you with an affordable installment loan. Loans Canada has been helping people find financing at a far more reasonable rate.
Click here for another analysis on personal loans vs. payday loans.
Rating of 5/5 based on 3 votes.
Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
Borrow up to $50,000 from Fairstone and be automatically entered to win up to $5,000!*
Earn an average 5%¹ cash back at thousands of partners and at least 0.5%² cashback guaranteed.
Build credit while spending money with the Refresh Financial VISA card.
With KOHO’s prepaid card you can build a better credit score for just $10/month.
All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.
When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.
Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.
