When you’re hard-pressed for money, payday loans and personal installment loans can provide a lump sum of cash upfront. But these loans are vastly different from each other, particularly when it comes to where you can get them, how much you can borrow, deadlines for repayment, and overall borrowing costs.
What is a payday loan?
A payday loan is a short-term cash advance for a small amount — generally up to $500 or $1,000, depending on the lender. They have a low barrier of access since they don't require a credit check or collateral. This fast access to cash, however, usually comes at a steep cost, through high fees and/or interest rates, and a very short repayment period.
You’ll receive the money in a lump disbursement upfront as cash, a check, prepaid debit card, or an electronic deposit into your bank account. In exchange, you may issue the payday lender a postdated check for the total amount, including interest and fees. You can also grant the lender access to your bank account so it can recoup the payment on the due date.
The total amount is typically due within a couple of weeks, at longest within a month. Depending on your payday loan provider and state, you might have an option to “roll over” an unpaid balance into the next pay period. This, however, may carry additional fees.
These small loans are regulated at the state level. Depending on your state, payday loans may or may not be accessible to you, and states dictate rate caps and other consumer protections. When comparing installment loans to payday loans, use a payday loan calculator to compare the annual percentage rates (APRs) on each.
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Warning
Payday loan APRs averaged over 100% in all states where available, according to a 2022 Pew study, and in a few states with little regulation even averaged over 600%. This is significantly higher than personal loan APRs, which top out at 36%.
What is an installment loan?
A personal installment loan is typically a fixed-payment loan that you repay over a number of years in monthly installments (as opposed to in one lump sum when the loan is due). Personal loan qualifications vary somewhat between lenders, but most require regular income, a low debt-to-income ratio (DTI) — your total monthly debt payments divided by your pretax monthly income, expressed as a percentage — and a good-enough credit score (lenders tend to prefer a DTI below 35% and a FICO score above 670, but this varies).
To get an installment loan, lenders typically ask details related to your income, current debt, and personal information so they can check your credit. These steps help the lender gauge whether you can realistically afford the loan, and, based on your past borrowing habits, whether you’d be at risk of default.
Learn More: Are Payday Loans Safe?
Important
Most lenders let you prequalify before applying to see if you’re likely to qualify, and what rate you might be eligible for. Prequalification doesn’t hurt your credit, but when you apply for a loan, your score may drop temporarily by a few points.
Personal loan amounts depend on the lender, but are generally available from under $1,000 to $100,000 or more. Loan repayment terms also vary, but are frequently as short as six months or longer than 10 years, depending on the lender and the loan’s purpose.
You’ll receive the full principal amount upfront, which can be used toward expenses, like medical bills, car repairs, special events, or almost any other general purpose. Just be aware of whether the lender charges an origination fee. This fee is generally deducted upfront from the loan amount, but is expressed in the loan’s APR.
Check Out: Best Personal Loans With No Origination Fee
The difference between a payday loan and an installment loan
There are a handful of primary areas that distinguish payday loans from personal installment loans.
Where to find them
Installment loans are offered by traditional financial institutions, like large banks, community banks, credit unions, and online lenders.
Payday loans aren’t from traditional lenders. Instead, they’re often found at in-person storefront establishments that offer cash advance services. Some payday advance providers offer loans online. Whether you can access an online payday loan, however, depends on your state’s payday loan laws.
Good to know
Payday alternative loans (PALs) are short-term installment loans from certain federal credit unions designed to offer a much less costly option for bad-credit borrowers. Interest rates are capped at 28%, with repayment terms up to a year in some cases.
Credit impact
Getting a payday loan doesn’t require a credit check, and payday alternative loans may not require one either. Removing this barrier can make accessing money easier if you’re in a tight financial situation. Instead, the primary hurdle involved with either loan type is proving you have income to repay the cash advance.
With a personal installment loan, most lenders run a hard credit check when you apply to see if you’ve had issues with late payments, delinquency, default, or bankruptcy. If you do, and your credit score reflects these negative marks, you might have a harder time getting approved.
Additionally, personal loan lenders, including PAL lenders, report data about your installment loan to the major credit bureaus, which helps you build your credit history. But if you don’t make your payments, this payment history is also reported to the credit bureaus.
Cash advance providers, on the other hand, typically don’t report loan data to credit reporting agencies, so your credit report isn’t affected. If your payday loan goes into debt collections due to nonpayment, however, this data can negatively impact your credit.
Borrowing amounts
Payday loans generally offer amounts up to a few hundred dollars. With traditional personal loans, amounts tend to be higher — minimums may be $1,000 or more. But you might find some lenders offering lower amounts. PALs offer loan amounts as low as $200 and high as $2,000, depending on the type.
Loan cost
Perhaps the top factor when comparing each loan type is borrowing cost. Payday loan interest rates can be over 400% APR, depending on where you live — much higher than personal loans and PALs.
For example, in Tennessee, the average APR on payday loans was 460%, according to the 2022 Pew study on the cost of payday loans. The state with the lowest-cost payday loans was Colorado, with an average APR of 114%, according to the study. By comparison, the average personal loan rate as of November 2023 was 15.91% on a three-year loan, for borrowers with good credit.
Tip
APRs on personal loans generally top out around 36%, and APRs on payday alternative loans can’t exceed 28% (by law).
Repayment timeline
Another stark difference between payday loans and installment loans is how much time you have to pay them back. Payday loans must be repaid in one payment by your next paycheck or income period. For some borrowers, this could be as short as two weeks.
Since personal loans often involve much higher borrowing amounts, you generally have a longer runway for repayment. Many lenders offer terms as long as seven years, possibly longer. If you take out a payday alternative loan, you could have up to one year to repay it.
Personal loans for bad credit
If you’re worried about getting an installment loan with bad credit, some lenders offer loans that are accessible to borrowers in your credit situation. However, look out for personal loan scams that target individuals who are in dire need of fast money. If you’re considering a personal loan, do your due diligence by researching the loan’s rates and the lender’s credibility.
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
Payday loans vs. installment loans FAQ
Is a payday loan installment or revolving?
A payday loan is neither an installment nor a revolving loan. Instead, it’s a cash advance against your next payday, hence its name. You agree to borrow a small, fixed amount from a storefront or sometimes online lender and typically repay the amount — plus fees — in one payment. The loan is usually due by your next pay period.
Where can I find a $500 personal installment loan that isn't a payday loan?
Some financial institutions, like credit unions, offer personal installment loans for low borrowing amounts. These small-balance loans can be as low as $200, similar to what you might expect from a payday loan. However, unlike a payday loan, these small installment loans often cap APRs at 28% or 36%, depending on the type of loan, and offer longer repayment terms, sometimes up to one year or longer.
What is the difference between a payday loan and an unsecured personal loan?
Key differences between payday loans and unsecured personal loans include their eligibility criteria, available borrowing amounts, and notably, their interest rates and fees. Payday loans generally require a postdated check or access to your bank account as a form of payment, and the APR could be over 600%, depending on the laws in your state. Conversely, unsecured personal loans don’t require collateral and generally charge much lower rates, regardless of your credit standing.
Learn More: Payday Loans vs. Personal Loans
