Installment loans safer than payday loans? Comparison of the pros and cons

The offer of modern loan institutions is not only popular payday loans, so quick loans for relatively low amounts of money. An increasing number of loan companies present on the Polish market also offer their clients solutions such as long-term installment loans. Obviously, the second of these options in terms of the basic mechanism of its operation is much closer to bank loans than it is in relation to the so-called Online Payday Loan.

Customers interested in obtaining financing under non-bank loans often wonder what is the more financially advantageous option: payday loan or repayment in installments?

Let’s take a closer look at this issue and try to present the topic outlined above in the most comprehensive way possible.

Payday loans and installment loans: basic differences

Payday loans and installment loans: basic differences

Seemingly the difference between payday loan and installment loan seems obvious. In fact, the case often turns out to be a bit more complex. At the beginning let’s list the factors that without any doubt determine the difference between payday loans and installment loans:

  • 1. We pay off payday loans once, while the installment loan is repaid in installments
  • 2. The duration of the contract in the case of payday loans is much shorter than in the case of installment loans
  • 3. The available loan amount for payday loans is much lower than for installment loans

Next, let’s list some common or even “stereotypical” beliefs that do not fully coincide with reality:

  • 1. The process of verifying creditworthiness for payday loans is always simpler than for installment loans
  • 2. An installment loan always means a “long-term loan”
  • 3. An installment loan is only used to finance larger expenses
  • 4. Instantaneous cash payments can be paid out via the GIRO check, while the installment loan will not have this option
  • 5. Payday loans are often associated with various promotions, while installment loans are only a standard offer

Each of the five views mentioned above is not adequate to reality. However, despite this, customers very often in this way make a distinction between payday loans and installment loans, which of course in many cases leads to the selection of a less favorable offer.

Can an installment loan act as a payday loan?

Can an installment loan act as a payday loan?

The answer to the above question is yes! Loan institutions that primarily or exclusively provide payday loans usually advertise their services as easily accessible, quick and by definition intended to finance “small expenses”.

However, it is worth realizing that each of these elements can also be found in the offer of some installment loans:

  • 1. An installment loan will in many cases be available on a statement. In this case, verification of our creditworthiness boils down to declaring the amount of income achieved in the application for a loan, verification of our data in BIK or KRD databases and possibly additional quick verification through services such as Instantor or Kontomatik. The belief that installment loans will always require, for example, presenting income declarations is a myth.
  • 2. An installment loan does not have to be a loan for a large amount of money. We might as well borrow, for example, 2,000 or 3,000 PLN with repayment in 6, 12 or 18 monthly installments. This means no less and no more that a non-bank installment loan can also be used to finance smaller expenses. What’s more, in this function a loan with repayment in installments often turns out to be a much more advantageous option than taking a payday loan (this will be discussed later in this text).

It is clear from the above information that payday loans and installment loans do not differ in terms of their intended use. An installment loan is simply a much more flexible option: the customer can use it to finance small expenses as well as expenses requiring much more money.

Also, the belief that the installment loan is, in principle, less accessible than the payday loan is not confirmed by reality. Of course, there are companies on the market that require their customers to provide additional documentation, but the same applies to offers of some payday loans. Very often the installment loan is simply available on the statement, according to the scheme described above.

Instant payment or installment loan: what is more profitable?

Instant payment or installment loan: what is more profitable?

1. Payday loans and related risks

Practice shows that customers using payday loans very often pay attention primarily to the presence of a promotion under the title Real Annual Interest Rate at 0%. Undoubtedly, the option of borrowing “for free” is a tempting solution, but it is not always worth giving in to suggestions. First of all, remember that even a free loan must be paid back, usually within 30 days. What happens in the absence of timely repayment? Most often, the promotion automatically ceases to apply to us, which means that we must pay the payday payday according to the standard cost table. Another option that can be used – if the loan company provides such a solution – is to extend the loan or refinance it. However, it is worth remembering that fees for extending the repayment period or commission for a refinancing loan are not included in the APRC. Most often, the commission for extending for a further 30 days will be 25% of the value of the entire loan, so by extending the free loan for PLN 2,000, the commission will be about PLN 400.

On the other hand, refinancing loans are even more complex. In this case, we will also have to pay a commission, but that’s not all. A refinancing loan is a separate loan product not provided by our primary lender, but by a cooperating company. This means that the financial terms of such a loan may differ significantly from the conditions under which we took out a loan under the APRC commission at 0%.

Does this mean, however, that you should not use free payday loans? Of course, such a claim would be a great exaggeration. Quick loans with a short repayment period are, however, intended for those clients who are absolutely certain that they will be able to repay their liabilities within the period provided for in the contract. If, when taking a payday loan, we are not sure that in 30 days we will have an amount of, for example, 2 or 3 thousand zlotys – it will be much better and safer to look around for the installment loan offer.