If there is any emergency need and you want a loan but if you have a bad credit score then do you get a loan? There may be various ads showing you fastest loans without any paperwork but when you go and apply for a loan all the process starts up. Here in this article we throw light on the two kinds of loans which are hugely popular: Payday loan and Installment loan.
Payday Loan
A payday loan is a short term loan which is issued as an unsecured loan which is issued between the salary dates for any emergency requirements. Payday loans are issued considering the credit score and payment history of loans. The process of getting a payday loan is very simple and it is online.
- The loan amount is smaller in terms which is generally a couple of thousand Dirhams and it is quickly processed.
- Payday loans have a very short repayment period and this is usually the following payday, the salary payment date.
- Interest rates are very high and they are charged sometimes beyond the market rates
- Fastest mode of loan processing with instant disbursals
- Funds are transferred into the account holder’s account on the same day or the following day.
- High interest rates make the borrowers fall into debt cycle, it is advised to take loans only if it is needed.
- If the loan is not repaid then the lender has the right to take over the amount which is available in the account. It creates financial disputes and the lender will resort to collection of debt strategies.
please check: Types of Emergency Loans and their Uses
Installment Loan
In the UAE, the installment loan is issued by the lender for quick cash urgencies considering the credit score. The amount of debt can be repaid in the given installments. The installments are decided during the issuance of the loan. The rate of interest is fixed and it is a long term loan. The big ticket purchases can be made with the installment loans. Purchases such as cars, properties, assets and much more.
- The payment schedule is systematic and scheduled. The predetermined repayments dates will help the borrower to plan the expenses and monthly payments accordingly.
- The loan amount is bigger than the payday loan as this amount can be used for home renovations, hospital emergencies, purchase of assets and much more.
- The monthly payment amount is fixed and it will not change during the term of the loan unless there is any part payment of the loan.
- The borrower should take this loan only when they are ready for a long term commitment to repay the loan
- The repayment period is longer and hence the interest rate charged by the lender is very much higher.
- Installment loans have the higher risk of default as the loan tenure is high and repayment chances are slim.
A Quick Comparison: Payday Loan Vs Installment Loan
The following is the difference between Payday Loan and Installment Loan
| Criteria | Payday Loan | Installment Loan |
| Definition | A short term loan where the repayment should be done on next salary payment day | A long term loan where the repayment is scheduled over a period of months/years |
| Security | There is no security required to get this loan | There is a collateral security required to obtain this loan. |
| Payback loan | Loan can be repaid during the next salary payment date | Loan payoff can be from less than 12 months to 60 months depending on the loan agreement |
| Interest rates | Interest rates are very high | Interest rates are lower and competitive, repayment terms are stretched over the years and there is no burden for the borrower. |
| Loan disbursals | Fastest and Quick loan disbursal | Loan are disbursed based on assessment of the underlying collateral and it is time consuming compared to payday loan |
Key points to consider to decide which loan is best for you
- Make an assessment of your financial situation and decide which loan you need either a Unsecured loan (Payday loan) or Secured loan (Installment Loan).
- Consider your loan repayment capacity factors such as your income, savings and repayment ability
- Payday loans have high interest rates, think twice about it and go ahead if you can repay the loan.
- If you have a long term plan and the nature of expense is huge then considering installment loan is sensible.
- If you have a collateral to mortgage then installment loan is a good option.
Takeaway
Payday loan or installment loan both have their own benefits and drawbacks from rate of interest to repayment schedules. Short term goals and long term goals plan your expenses into these categories and choose the best loan that you can afford to repay during the given period of time. Non Repayment or delayed repayment will affect the credit score adversely so consider an efficient repayment plan and choose the best loan for your financial requirements.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
