There are various types of loans available nowadays. Finding the right type for your needs has therefore become difficult as the matter is filled with complications to some extent. There are short-term loans including instalment loans and payday loans to name the most common types. Then come the long term loans such as bank loans, home mortgage, car finance and more.
With so many technical terms and various conditions attached to each, it is not surprising that so many people fail to understand them. A reliable lender should however, ensure that the details are made easier, simpler and straightforward for the customers. The idea is to educate and empower the borrower enough to make them understand what they are getting into.
This is a compilation of the basic information you need to know so that you do not end up finding yourself in a difficult situation later on. Given below are the basic differences between the different and most common types of loans.
Short Term Loans
This type of loan is exactly what its name suggests. It is a loan taken for a fixed period, which is often very short. The returning period of a loan must not be more than a year for it to be categorized as short-term. Short-term loans include loans with different procedures and benefits and the borrower is bound to pay back the money in the time duration of the loan.
Both instalment loans and payday loans come under the category of short-term loans. You must be wondering if they both are short-term loans, then why they are referred to, separately. This is because they have a minute difference:
A payday loan is a loan that you will have to pay until your next payday. It is also defined as an early payday since it covers for your expenses until your next salary comes in. Mostly, payday loans are taken for a two-week period.
Payday loans are ideally used in case of an emergency where an unanticipated expense has come up and fast cash is required. However, the downside of payday loans is that they have higher interest rates and additional fees in case of delayed repayment. This is why they must only be utilized in case of an emergency and never for extravagance.
If we look into the history of payday loans, most of the times, they have made people pay back more money than they had originally planned to repay. This is because of higher interest rates and the additional charges imposed on them due to late repayment. Their payments are also often rolled over numerous times.
Until January 2015, there were no restrictions on the amount of time your payment could be subjected to a rollover. This meant that people had to keep struggling to pay back their money as the interest kept increasing further and further.
However, in 2015, the Financial Conduct Authority made a few regulations that restricted the amount of times a loan could be rolled over to two times. Additionally, these rules made sure that the customer is not charged a lot of additional money. The maximum amount a borrower can pay must not be double the original sum borrowed.
Instalment loans are also short-term loans but they are different from payment loans because of their greater relaxation when it comes to repayment. They are a more flexible option for the borrowers.
Basically, when you take instalment loans, you have the liberty to divide the total amount of loan into different sizes over a few months. You are then making the repayments in instalments. This makes the repayment more manageable and easier.
The terms for repayment are different with every lender. While some of them have very rigid repayment plans, there are others who might offer you a more flexible plan. With the rigid plans, your time is fixed and you must return the money within that time period.
Whether you go for a payday loan or an instalment loan, the purpose of both remains the same: to lend you money without making it difficult for you to repay. While many lenders strive to make money on the interest and additional fees, some are very reliable as well.
When comparing the two, here is what we came up with:
- You can borrow a greater amount of money using instalment loans compared to what you could get with payday loans.
- Another advantage of instalment loans over payday loans is that no rollovers are involved. Therefore, there are lesser chances of overpayment. However, the interest rate may be a little more because you have been given more time to pay it back.
- An instalment loan usually means that you have at least three to six months to pay back your loan. If you happen to have some amount of money but not all of it, pay that amount. The interest is then calculated on the amount of money left to be paid. Therefore, as the loan keeps decreasing, things are going good for you. You do not get this freedom with payday loans though.
- While instalment loans give you the liberty to pay back in a longer time, payday loans are a better choice if you are looking for money for an emergency. They instil a sense of responsibility as well. Besides, there are other benefits of payday loans such as extension of the loan.
- Even the law is now on the borrower’s side and provides protection not only from getting charged extra money but also from harassment. These protective laws are enough to encourage a person who is in dire need of money to go for payday loans.
- Another advantage of payday loans over instalment loans is that they are easier to get. You can even go for online transactions and the money will be transferred to your account immediately. Therefore, it is a great option in cases of emergencies.
On the whole though, payday loans work best if you find the right lender. This is where Quiddi Compare comes into the picture. We offer you a comparison between the best payday lenders in the UK for all your immediate financing needs.