Traditional Installment Loans vs. Payday Loans
Traditional installment loans (TILs for short) are radically different than payday loans in many ways—most of which assert that TILs are overall better in terms of affordability and safety. With rates that are priced, structured, and regulated, TILs have many reasons why they are simply the smarter option.
Learn more about the differences between traditional installment loans and payday loans below:
TILs are less expensive – It may seem like the upfront cost of TILs are overwhelming, but they are actually more affordable in real dollar terms when compared to payday loans.
Payday loans have ballooned costs – The APRs are as high as 400% which are three to ten times higher than those of TILs. There are also several different hidden fees for payday loans, such as lenders offering consumers the chance to “roll over” their loan. This means that they can take out additional cash to pay off the old loan, but each time a loan is rolled over, the lender tacks on more and more fees. Ultimately, the borrower can end up paying way more than they originally intended.
TILs have a reputation of being safe – If a borrower cannot make the full payment when it comes due, TIL lenders will work with them so that everyone can come to an agreement that will see the loan to completion. Because of this, TILs are known as the safer option.
Payday loans are known to lead to the “cycle of debt” – If the borrower cannot repay the full payday loan at the end of a period, they’re left with no other option but to refinance. This can result in what is called the “cycle of debt.” When the the borrower has to refinance the balance of that initial loan, it can quickly add up and put them in a cycle that is hard to break.
TILs will not harshly penalize late payments – TIL lenders will work with borrowers who might be late on making a payment and will only penalize within reason and fairness. Plus, they will never get the authorities involved to collect on a loan.
Payday loans charge bulky fees for late payments – There may be a significant punitive effect on defaulters when the payday lenders charge them a bloated fee in addition to their bank’s NSF fee. This only adds more strain, which plummets borrowers deeper into the “cycle of debt.”
TILs have longer terms – These loans have longer terms lasting six months to a year or more. Stretching payments out over a longer term is one way to help keep them manageable. The law in Illinois even places certain restrictions on lenders rolling borrowers over into a new loan in order to try to put a cap on how long people are in debt.
Payday loans have short terms – Payment is due at the end of a loan period which is usually shorter than a month, sometimes as little as two weeks. This is often not enough time for many people.
TILs are repaid in regular, manageable installments – This type of loan is fully amortized, which means that the interest and principal are both repaid in equal installments. By knowing what to expect from month-to-month, you have a clear roadmap out of your debt.
Payday loans are repaid in one single huge payment – This ballooned payment is typically due at the end of a loan period which is usually shorter than a month, sometimes as little as two weeks. This can result in significant problems for the borrower if they cannot make this large lump-sum payment within this time.
TILs can be paid off early – Because TILs are fully amortized, this means that the borrower has the ability to save by paying off the loan early, and TIL lenders even refund unearned charges if a loan is repaid early.
Payday loans impose a penalty for early repayment – In many cases, there is a penalty for early repayment, leaving the borrower to sit on that money until the correct time.
TIL lenders expertly assess borrowers – Before granting a loan, TIL lenders will properly assess the borrower’s ability to pay during the underwriting process. They do this by calculating the borrower’s monthly expense/net-income budget in order to ensure that the payments will be met through their monthly cash flow.
Payday lenders don’t take the time to properly assess borrowers – Payday lenders will instead rely upon access to the borrower’s bank account or a postdated check as their only assurance that a loan will be repaid.
TIL lenders are licensed – Traditional installment lenders are typically licensed, in which they must adhere to regulations by the state. They are also audited by consumer protection agencies and fully comply with SMART Principles for Microloans.
Payday lenders are not required to be licensed – While this depends upon their type, not all payday lenders are licensed. This means that they are not obligated to follow all of the same regulations and principles as their TIL counterparts.
TILs affiliated with credit bureaus – TIL lenders report to credit bureaus, which allows borrowers to rehabilitate damaged credit or establish new creditworthiness. As a result, borrowers now have access to even more credit options, often at lower rates.
Payday loans not affiliated with credit bureaus – Credit bureaus will not accept data from payday loan companies. This means that the successful repayment of a payday loan will have no useful benefit to a borrower’s credit score.
TILs are regulated – TILs have long operated within the legal framework. They are affiliated with and thoroughly regulated by state and federal consumer protection agencies. For example, in Illinois, consumers benefit from regulations that protect them from unlimited rollovers in addition to now requiring the lender to base their loans on a borrower’s ability to pay.
Payday loans have unpredictable regulations – Regulations for payday loans have a shorter and less robust history. They vary widely from state-to-state and are sometimes completely absent where they are necessary. For instance, unregulated underground or offshore loans.
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