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Differences between Instalment and Payday Loans

What is an instalment loan? What is a payday loan? Are there differences between payday loans and instalment loans?

When you're looking for a loan, you run into lots of different terminology and a lot of it can be confusing. To help you out, here's a breakdown of instalment loans, payday loans, and the differences between them.



Instalment Loans VS Payday Loans

Instalment loans are longer-term loans that you pay back over time, a small portion at a time.  Payment terms for instalment loans vary but can be weekly, bi-weekly or even monthly. Instalment loans are sometimes also referred to as term loans.  Depending on the type of term loan, you may have a term that ranges from a couple of months to, in the case of a mortgage for example - several decades to repay an instalment loan.

Payday loans, sometimes called cash advances, are short-term loans that you pay back quickly.  Traditionally, you repay a payday loan on your next payday – hence why they are called payday loans.

 The approval process can vary by the type of loan.  An instalment loan can take some time to get approved and often requires significant amounts of information and documentation.  Your credit score is a very important factor, and when applying for an instalment loan, the lender will usually check your credit score and will only approve your loan if your credit score falls within their limits.   When applying for a payday loan or cash advance, in most cases, there is no credit check required. 



Amount of Loan: Payday Loan VS Instalment Loans

Payday loans tend to be for relatively small amounts of money. Some payday loans can be as little as $50 or even up to $1,500, and are designed to help someone through a financial emergency. The amount you are eligible to borrow is based on the province in which you live as well as your income.

Instalment loan amounts can range from small to large but tend to be bigger. For instance, if someone takes out a bank loan, that is considered an instalment loan. These loans could range anywhere from $1,000 to $100,000, or even more.  People can use instalment loans to buy anything from small-ticket items to large-ticket items such as vehicles, homes, or even to fund businesses, or consolidate debt.



Repayment Amounts: Instalment Loans VS Payday Loans

With instalment loans, the repayment amounts are based on three factors: the amount of the loan, the length of the term, and the interest rate on the loan.

Here is an example of an instalment loan repayment. Let's say you borrow $10,000 from a bank, and the bank gives you five years to repay the loan (a 5-year term). The bank will calculate the amount of interest that's going to accrue over the 5 years and divide the total into monthly payments over the lifetime of the loan.

For example, if your interest rate is 7% on a $10,000 loan, your monthly payments will be $198.01 over a five-year repayment term. With this instalment loan, you repay a total of $11,880.72 over the lifetime of the loan. That's $10,000 for the loan and $1,880 in interest.

With payday loans, the repayment amounts vary by the province that you live in and by the lender. In Ontario for example, the max amount a lender can charge is $15 per $100 loaned. Which means that if you borrow $300 for 14 days, the total cost of borrowing would be $45. Which makes the total repayment amount $345.

Compare that to British Columbia, where the maximum charge permitted per payday loan is 17% of the principal. So, for a $300 loan for 14 days, the total cost of credit is $51.00.

We recommend that you check the regulations for the province that you live in to make sure that you are getting the correct rates. The Canadian Consumer Finance Association has this information listed for each province for easy reference.

In either case, if the loan is not paid back on time, fees can be assessed that will increase the total repayment amount. Staying committed to the agreed upon payment schedule is key to avoid these fees in either scenario.



Early Repayment Penalties: Instalment Loans VS Payday Loans

An early repayment penalty is when a lender charges you a fee for repaying the loan early. In most cases, payday loans don’t have early repayment penalties. Payday loans or cash advances charge a fee and you pay the same fee whether you pay back the loan early or on time.

In contrast, some instalment loan lenders charge a fee if you repay the loan early. Here's why: Lenders make money on interest and fees; that's how they cover the costs associated with lending money and how their businesses make profits.

Always review repayment clauses and check with your lender for details on your loans.



Collateral: Instalment Loans VS Payday Loans

Collateral is simply an asset that backs up a loan. When a loan requires collateral, the lender can take the collateral if you default on the loan. Most term or instalment loans are backed by collateral. The two most common examples are car loans and mortgages.

With these loans, the car or the home act as collateral on the loan and if you default the bank has the right to take possession of the collateral.

Payday loans, in contrast, do not require any collateral. Most payday loans require proof of your income, and they require you to set up repayment in advance but no collateral is needed to get your cash.



Cost of the Loan: Instalment Loans VS Payday Loans

The most significant difference in the cost of an instalment loan versus a payday loan comes down to how long you take to pay back the loan. Because payday loans are intended to be small fund allotments that are quickly paid back, the costs associated are expressed in fees rather than interest rates. Let’s break it down.

  • Instalment loans use an Annual Percentage Rate (APR) to express costs. If you borrow a $1,000 instalment loan at a 7% APR and take a year to pay it off, it will cost $70. This does not include potential additional fees, such as application fees, loan origination fees, late fees or early repayment fees.
  • Payday loans use fees to express costs. If you borrow $300, depending on the province you are in, the fee to borrow the money is around $54 flat - no hidden costs. Remember, payday loans are intended to be short-term loans, usually paid back within your next paycheque, so as long as you use them as intended, they can be a simpler alternative to instalment loans.

To summarize, instalment loans and payday loans are very different, and they can both be useful in different ways depending on your individual needs. If you need to purchase a big-ticket item or asset, an instalment loan may be the right option for you. If you need emergency cash up to $1,500, and you can repay it with your next paycheque, online payday loans may be the right option.  For a quick and easy payday loan approval process, Apply Now with 310LOAN.com.

Keep checking our blog to learn more about lending, online loans, and personal finance.
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