Payday Loan vs. Installment Loan: What’s the Difference?

When you’re running short on funds, financial options can feel limited — especially if you don’t have great credit. You might need to charge necessities to an existing credit card, ask friends and family for money, or find a quick way to earn extra income. 

If none of these options sound viable, you might consider a Payday Loan or Installment Loan. 

How does a Payday Loan work? 

A Payday Loan is a small-dollar loan, usually no more than a few hundred dollars. Depending on your lender, most Payday Loans max out at $1,000 and are based on your paycheck amounts. Also known as Cash Advances, Payday Loans are small because they’re meant to be repaid in full on your next payday. 

Payday Loans can help if you need extra money to cover your necessities before your next payday. Here’s a quick rundown of how these types of loans work: 

1. You apply online or in person through a direct lender. You typically need a form of government-issued ID, a bank account, and some basic financial information. 
2. If you’re approved, the lender will issue you the funds, usually through direct deposit. 
3. Once you have the money, you can use it to pay for whatever you need. 

Depending on your lender and loan terms, you typically repay the loan in two to four weeks. If you fail to repay the loan on time, you’ll also owe any late payment fees. 

How does an Installment Loan work? 

Installment Loans are slightly larger and more long-term than Payday Loans. Installment Loans from direct lenders are typically no more than a few thousand dollars. 

Because of these larger amounts, you often have several months (or even years) to repay an Installment Loan. Rather than a lump sum repayment, you make monthly payments over time. 

As with a Payday Loan, you can apply for an Installment Loan online or in person. If approved, you can use the funds however you wish. Just remember, as with any type of debt, you’ll face unwanted penalties and fees if you don’t make your payments on time. 

Payday Loan vs. Installment Loan: Key differences 

Both Payday Loans and Installment Loans can provide solutions for getting out of a financial jam. Aside from this similarity, these loans have some key differences. 

1. Application process 

Since Installment Loans are typically larger than Payday Loans, lenders tend to require more documentation during the loan approval process. In addition to ID and a bank account, you may need multiple pay stubs and bank statements to prove your ability to repay. 

2. Credit requirements 

Because of their small amounts, Payday Loans typically have little to no credit requirements — but this is also why they tend to have higher interest rates. 

Banks, credit unions, and other traditional lenders will have more stringent credit requirements for Installment Loans. If you’re worried about your credit history, consider a direct lender like Advance America. 

3. Cost and fees 

Installment Loans often have fewer fees and a lower total borrowing cost than Payday Loans. 

For example, a Payday Loan might cost $10 to $30 for every $100 you borrow, depending on the lender. Interest on an Installment Loan is generally a percentage of the amount borrowed. Both types of loans will incur additional charges for late or missed payments. 

4. Where to apply 

Payday Loans are often only available through online or direct lenders. While Installment Loans are available through these types of lenders, they’re also available through most banks and credit unions. But the application requirements may be even more stringent when you use traditional options. 

5. Borrowing amounts 

The main difference between Payday and Installment Loans is the borrowing amount. Payday Loans typically max out at $500 to $1,000, while Installment Loans can be tens of thousands of dollars. It all depends on who your lender is and what their maximum loan amounts are. 

However, you may be able to find smaller Installment Loans when you go through online or direct lenders. Advance America, for instance, offers Installment Loans up to several thousand dollars, depending on your state and financial situation. 

6. Time to fund 

Another key difference is that Payday Loans often offer instant funding, especially when you apply in person. Because Installment Loans can be much larger than Payday Loans, they may take longer to fund. 

Both types of loans offer faster payouts when you apply through a direct lender. You may even qualify for same-day funding online! 

7. Repayment schedule and process 

As a general rule, Installment Loans have a more borrower-friendly repayment schedule and process than Payday Loans. With Payday Loans, you typically have two to four weeks to repay the loan plus interest, and you’re expected to do so in a lump sum. 

Due to Installment Loans being larger than Payday Loans, you have longer to repay them. Some lenders give you several months or years to fully repay the loan, and you can do so through monthly or bi-weekly payments. 

8. Loan APRs 

Installment Loans tend to have lower APRs than Payday Loans because they have more stringent borrowing requirements. Some lenders even require a credit check before they approve you. As such, there’s less risk to the lender, resulting in lower interest rates.

 9. Credit impact 

Whether or not Payday and Installment Loans impact your credit score depends on your lender. Applying through an online direct lender typically won’t affect your credit. 

If you apply for an Installment Loan at a bank or credit union, however, it could affect your credit score. You may see a bump if you repay the loan on time and in full, but your score may take a hit when you apply or miss a payment. 

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Payday Loan vs. Installment Loan: Which option is right for me? 

Which type of loan is right for you depends on how much money you need, how soon you need it, and your overall financial situation. If you need several hundred dollars as quickly as possible, a Payday Loan is the way to go. 

Fill out an application to get the money you need today!