How is is an Instalment Loan Different from a Payday Loan?

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Instalment loans and payday loans carry often high interest. The reason behind it is partly because the borrowers have a little or poor credit history or/and are low-income typically. Such people cannot access less expensive types of consumer credit such as home-equity loans through credit union or banks, or credit cards. However, payday loans and instalment loans can have negative effects on consumers. These loans can drag the borrowers in a deeper cycle of debt.

Payday Loan

The amount of the loan is usually from £50 to £500 for first time borrowers. This amount can sometimes be increased to £1000 once the previous loan has been paid off. This loan is short term and you will have to pay the entire amount within 42 days or less. Generally, you have to pay back the money immediately after receiving your next pay.

The lender is entitled to withdraw the money automatically when your employer will deposit your pay in your bank account. The lender can charge the fee for the loan and can calculate it as an annual percentage rate (APR). A representative example would be, for a loan of £100 due to be paid back in two complete weeks, the total amount to be paid back will be approximately £120.92.

Most payday loans are unsecured. The only way for the lender to evaluate your ability to repay the total amount is to check your affordability. If you cannot pay back the loan according to the deadline, you will have to incur extra fees and owe the initial amount in other two or four weeks.

Instalment Loan

The amount of the loan is usually from £100 to thousands of pounds. You will have to repay the principal amount, interest and additional fees over the fixed term. The lender will fix the term of payment and it can be monthly payments. The APR can also vary from 4% to over 100%.

The stated annual percentage rate listed on the loan contract may be lower than the effective APR if the lender included illegally some types of credit insurance in the APR calculation. You can renew the loan every few months with new credit insurance premiums, fee, and interest’s charges.

The lender can secure the loan with private property, except if the property is a real estate. The security may also include jewelry except wedding rings, power tools, consumer electronics, and cars, however there are unsecured loans available too.