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If the COVID 19 pandemic has taught us anything, it is that financial distress can be sudden and hard-hitting. The economic situation is naturally much worse for people with bad credit since they have fewer avenues to turn to to get loans. If you are in the same boat and need urgent cash, then you might be considering a payday loan.

But before you do, please read this full article as we will explain why there might be better alternatives to payday loans. The main alternative that we will focus on is installment loans.

What are payday loans?

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Payday loans are short-term, unsecured debt. Essentially when you get a payday loan, you are getting an advance on your paycheck, and you are expected to payback from your next salary. Payday loans are not collateralized, so to make up for the risk, lenders charge abhorrently high interest rates.

Payday loans are generally meant to be paid back after two weeks or a month. Although, there are newer types of payday loans that can be paid in installments.

To get a payday loan, you need to have a job and an active bank account. When you apply for a payday loan, you’ll have to present your pay stub and a post-dated blank check. If you do not pay back the loan on time, the lender can draw from your bank account.

Advantages of payday loans

The main advantage of payday loans is that they do not require credit history checks. So people with bad or no credit can apply as well. Secondly, it is generally easy and quick to acquire with most lenders promising same-day payment. Furthermore, since payday loans are unsecured, they do not require any collateral.

Disadvantages of payday loans

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The primary disadvantage of payday loans is that they charge extremely high-interest rates. The average payday loan interest rate is between 400 to 600% APR. This should be reason enough for you to reconsider payday loans. A 600% APR means that if you borrow $100, you’ll have to pay back $150 in a month.

Secondly, payday loans are very short term and you have to pay them back when you get your next paycheck, which can be a week or a month. Furthermore, you can only get up to $1,000 from payday lenders.

Payday lenders do not report to credit bureaus, so even if pay the money back on time, it will not help build your credit history.

Why borrowers look for payday loan alternatives

The main reason that borrowers look for payday loan alternatives is that such loans have predatory interest rates. And if borrowers are not careful, they might end up in a vicious cycle of debt.

We will now talk about installment loans and how they can be a viable alternative to payday loans.

Installment loans

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Installment loans are loans that can be paid back in installments. There are many types of installment loans available ranging from personal loans to No-Credit check installment loans.

Most installment loans have a minimum credit threshold, although you can find installment loan lenders at any credit score.

The resulting interest rate on the installment loan will depend on your credit score. Needless to say, a better credit score will result in better rates.

Since we are considering it as an alternative to payday loans, we will talk about bad credit installment loans. Like payday loans, people with poor credit can apply for such installment loans.

According to David Winfield, “Unlike payday loans, bad credit installment lenders do look at different aspects of your financial history. They will consider how much debt you already have, your monthly income, and your expenses”.

Advantages of installment loans over payday loans

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The main advantage of installment loans is that they charge lower interest rates, with an average APR of 36%. You can go online and compare different loans to get the lowest rates. There are various loan calculators available online that you can use to calculate how much you will end up paying.

Secondly, since the installments are fixed throughout the life of the loan, you will be able to lock in rates. This can be especially helpful if you can get rates that are on the lower end of the spectrum.

This also makes installment loans more predictable and gives you the ability to price in the monthly installment in your budget.

Another advantage that installment loans have over payday loans is that they give you the ability to pay back over a longer period. The loan tenure can be anywhere between a few months to 10 years. So, you can chip away at the loan little by little rather than having to pay back the lump sum (with interest), all at once.

Furthermore, while payday lenders allow you to borrow a maximum amount of $500 to $1000, you can borrow a much larger amount by getting an installment loan. Read even more on installment loans here.

Installment loan lenders also report on time to various credit bureaus. If you make timely installment payments, you can actually build up your credit history substantially.

It is quite clear that installment loans have many advantages over payday loans. But just to give you a complete picture, we will also discuss some of the cons of installment loans.

Cons of installment loans

If you have no credit history and opt for a No-Credit Check installment loan then you will be charged the same predatory rates that are charged by payday loans.

These installment loans have an average APR of 400%. Plus, considering that loan terms are longer, you can end up paying a lot in terms of monthly installments.

Secondly, you should be wary of the fact that most installment loan lenders do not allow for early repayments. Even if there is an option for early repayment, you will most likely have to pay a fine.

Other payday loan alternatives

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If installment loans are not your cup of tea then there are other payday loan alternatives that you can consider.

Advance on your paycheck

The best payday loan alternative is to simply get an advance on your salary. You will not be charged any interest and the amount will simply be deducted from your next paycheck. However, there are 2 issues with this option:

  • Not all employers offer paycheck advances.
  • The amount that you can borrow is limited by your salary.

Credit union loans

Credit Unions are non-profit organizations and a popular way of getting low-cost loans especially if you are already a member. Credit scores are not the primary concern of credit unions, as they also consider your rapport in the company, your monthly income, and credit history.

Credit unions also report to credit bureaus so paying back on time will help build your credit score. One thing to consider though is that credit unions take a few days to process loan applications.

Borrow from family and friends

As they say, money can ruin relationships. But if you are out of viable options then you can always consider asking friends or family for a loan. This is not an easy option for everyone but you are close enough to someone then you can ask them for one and then draw up the terms and conditions.