Installment Loans the Best Alternative to Payday Loans?
Due to increased state regulations governing short-term loans, many lenders are offering installment loans over payday loans. While both types of loans are available quickly to people who may have bad credit, there are some significant differences between them. If you're considering signing up for an installment or payday loan, it's important to know which is the best loan for your situation.
Installment Loans Versus Payday Loans
Payday lenders began offering installment loans as an alternative to payday loans. Due to their longer loan period, installment loans are not subject to the same state consumer protections that govern many payday loans. In an article titled, "How Payday Lenders Bounce Back When States Crack Down," Paul Kiel reports that in 2011, one payday lender estimated that payday loans accounted for 90 percent of the company's loans. In 2013, payday loans only accounted for half of the loans the lender issued. The lender had switched to other types of loans, like payday loans, which offered fewer protections to the consumers using them.
Before picking a loan, keep the following three points in mind:
Payday loans are unsecured loans. Installment loans are secured, so you may be asked to use your car or personal property as collateral. State laws may limit what you can use as collateral. If you don't pay an installment loan, you could lose your collateral.
Installment loans allow you to repay the loan amount over several months to several years. Payday loans usually require that the loan is repaid within two weeks.
Installment loans can be renewed after a few payments. The loan amount can be increased, and sometimes, you'll get a small payout. Payday loans can be renewed in some states if you cannot afford to make the payment. In order to renew the loan, you pay additional fees and agree to a new due date. Some states have outlawed payday loan renewals.
Common Risks for Both Types of Loans
Installment and payday loans both receive criticism from consumer groups due to their high interest rates and fees. Many former loan officials admit that their ultimate goal is to encourage borrowers to constantly renew their loans. That way, the payday lenders can maximize their profit on even small loan amounts.
A 2013 Pew Charitable Trusts survey indicates that the majority of people who use payday loans are desperate for the money they need. Thirty-seven percent of the participants indicated that they would take a loan under any repayment terms. Unfortunately, many of these respondents cannot afford to repay the loan with their current monthly income. These payday borrowers may be forced to declare bankruptcy to escape their loan obligations.
If you cannot afford to pay the loan amount, the lender may try to garnish your wages or sue you in civil court. When this occurs, you'll be responsible for any legal costs that you incur. Unscrupulous lenders can also inflate your principal amount, leading to garnishments that exceed state limits.
Should You Choose an Installment Loan?
Installment loans allow consumers to take months, not weeks, to repay their loan. This benefit can be highly attractive if you need several thousand dollars that you cannot afford to completely repay for several months. However, the length of the loan period allows lenders to ultimately charge even more interest and insurance fees than they could charge for payday loans.
Before applying for any loan, it's important to know your exact financial situation. Examine your budget carefully, and be realistic when determining how much you can afford to repay. If you need a loan, you should choose the shortest term loan you can afford and avoid renewing it under any circumstances. That way, you'll get the money you need without paying outrageous fees and interest rates.
Installment loans allow you to repay the principal over several months or years.
Payday loans usually require payment within two weeks.
Both loans have high fees and interest rates.
Always choose the loan with the shortest term you can afford to avoid paying excess fees and interest.