The Difference Between Installment Loans and Payday Loans
Prospective customers often ask if Fig offers payday loans. Fig is not a payday lender. In fact, we started out specifically trying to provide an alternative to payday loans in Texas, and have since grown to serve communities in other states. Fig provides payday loan alternatives in the form of installment loans. There are several differences between what we typically call "payday loans" and installment loans. In this post, we break down those differences so that when shopping for a loan, you can more easily distinguish between the loan types on offer.
Fast Fig Facts: Installment Loans vs Payday Loans
- Both payday and installment loans like the ones Fig offers are short-term (under 6 months) loans meant to address immediate cash needs.
- Installment loans are paid off in equal-sized payments, called installments.
- Repayment for most payday loans are due in full 2-4 weeks after you take them out, i.e., on your next payday.
- Installment loans usually have friendlier interest rates and policies than true payday loans.
- You can get installment and payday loans online, or at brick-and-mortar locations
Payday Loans: A Deeper Look
Payday loans, like the name implies, are typically due your next payday after taking the loan out. People take out payday loans to meet urgent cash needs, like a medical appointment or an unexpected car repair. They are supposed to function like emergency financial assistance, rather than traditional credit. Unfortunately, however, many people in the U.S. lack access to credit cards and more traditional loans due to past mistakes, little credit history, or being unbanked.
With a payday loan, you apply either online or in-person and go through some sort of basic income verification, such as reviewing your pay stubs, so that the lender can decide whether or not you'd be able to repay the loan. Most payday lenders do not do a credit check, which is why so many people with bad credit scores turn to payday loans in a bind. Many lenders will require a post-dated check for repayment, or will take payment via ACH on the due date.
What makes payday loans so dangerous is how easily one can fall into a debt cycle. This is due to a combination of factors, primarily the high cost of the loan and the unforgiving payment schedule. When we compared Fig to other online lenders, we did not even include true payday loans in the comparison because their interest rates and fees are in a different (worse) league.
For example, a popular payday lender with storefronts all over the country offers a true payday loan of $200 with a term of 14 days at an APR of 661.69%. This means that two weeks after borrowing $200, the lender expects you to repay $250. If you do not have $200 now, it is very unlikely that you will be able to part so willingly with $250 in two weeks, even if you get paid. Payday lenders know this so they allow you to refinance your loan, i.e., borrow more money and carry over your previous loan. This means you keep racking up interest and fees and go deeper in the hole. Suddenly, you need to keep borrowing money to pay back what you borrowed earlier!
Because of their potential danger, payday loans are regulated by the government. Unfortunately, however, different types of payday loans in disguise, including tribal loans, still proliferate. The further off the grid you go (or are forced to go because of your credit score), the more predatory the loans can get.
If you are considering a small-dollar loan and want to know if it qualifies as a payday loan, we recommend looking at the following factors: interest rate, fees, refinancing policies (how much debt can you continue to take on without paying down existing debt), and, most importantly, the payment schedule. All of those play a part in determining not only the cost of your loan, but its actual affordability.
Installment Loans: A Kinder, Better Option
Fig chose to offer installment loans where all payments are the same size and the interest rate remains the same over the loan term (fixed interest rate) because we have seen this payment structure work well with mortgages, which constitute the largest use of credit for most families. Although the payment size remains the same throughout the loan term, the percentage of each payment that goes towards the principal (what you borrowed) and the interest (the cost of borrowing) can change. All reputable lenders will break down exactly how much interest and principal you pay on each payment on your loan.
We have found that installment loans have several critical advantages compared to payday loans. First of all, the payment schedule is much kinder because you do not have to repay the whole loan at once. At Fig, for example, depending on your state and the loan you took out, your first payment is due either two weeks or one month after you took out the loan. We also give you flexibility on that date!
After that, your payments will come out on the same day each month or every two weeks, but again, that schedule is flexible. This is much more manageable because chances are, if you need a short-term small-dollar loan, you need more time to come up with the money for your payments, and you cannot pay the full amount all at once!
Installment lenders also often (not always) charge lower interest rates than their payday counterparts. At Fig, we can do this because our application and underwriting processes, although still very fast, are much more thorough. We do not look at your credit score, however, unlike payday lenders, we look at more than just your pay stubs to determine whether or not you can comfortably repay this loan while meeting your other financial obligations.
Many installment lenders also report to the credit bureaus, so making your payments on time can help you build your credit so that over time, you can qualify for more traditional loans or credit cards. Even if a payday lender reports to the credit bureaus, their single-payment loans will not help your credit score as much as an installment loan because you will have fewer payments overall on your credit report, and the account will not have been open as long.
If you are considering a payday loan, we urge you to first consider an installment loan (Fig or otherwise!), or these alternatives. We hope this post has cleared up the differences between payday loans and installment loans and shown you why installment loans can often work better for your cash and credit needs. If you have more questions about the different types of loans available, or you want to know more about how installment loans can help your credit, give us a shout at firstname.lastname@example.org, Facebook, Instagram, and Twitter.