Payday loans vs installment loans

Which loan should you get if your finances are struggling?

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By

Leanne Escobal

&

Emma Balmforth

Updated

Fact checked

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There are key differences between payday loans and installment loans, especially when it comes to annual percentage rates (APRs), loan terms and loan amounts. Overall, an installment loan has lower APRs, longer loan terms and larger loan amounts than a payday loan.

Understanding installment loans

An installment loan is a specific amount of money you borrow and pay back in installments with interest over a period of time. Technically, loans such as mortgages and car loans are installment loans, but in the comparison below, the “installment loan” we are referring to is a personal loan offered by alternative lenders to borrowers with fair to bad credit.

Traditional lenders like banks and credit unions also offer installment loans, but since their loans are for borrowers with good credit, we will not compare them with payday loans here.

Payday loan vs installment loan features

FeaturePayday loanInstallment loan
 

Loan amount

$100 – $1,500
$500 – $10,000
Loan term
By your next payday, up to 62 days
3 - 60 months
Annual percentage rate
Typically over 300% (borrowing fee is $14 for every $100 borrowed)
18% - 35%
Turnaround time
Instant
Within 24 to 48 hours
Eligibility requirements
Flexible – accepts bad credit and non-employment income
Less flexible – has credit score and income requirements

Payday loan vs installment loan: $700 example

Let’s say a borrower in Ontario wants to borrow $750 and is debating between payday loan and installment loan. Here’s how the cost can break down.

FeaturePayday loanInstallment loan
 

Loan amount

$750
$750
Borrowing cost
$14 per $100 borrowed = $105 (365% APR)
35% APR
Loan term
14 days
6 months
Payment amount
One full payment of $855
$138.07 monthly for 6 months ($78.40 in total interest)
Total loan cost
$855
$828.40

If you’re looking at the dollar amounts, the installment loan is around $30 cheaper. The key difference here is the loan term. An installment loan allows you to spread out your payments over several months. But watch out for longer loan terms, because if the loan term becomes too long, you may end up paying more in interest than a payday loan.

How to choose between a payday loan and installment loan

Both are high-interest loans. Generally, a payday loan should only be a last resort because of its extremely high interest rates and short repayment terms. When making a decision, ask yourself the following questions:

  • Can I afford to repay the loan within the loan term? Payments for both payday loans and installment loans will be automatically deducted from your bank account. If you don’t have enough money in it on the due date, you will be charged fees. Make sure you have an exit strategy before taking out a payday loan or installment loan.
  • How much do I need? Payday loans max out at $1,500.
  • Do you want to pay off the loan in 1 lump sum? Some people prefer to pay off the loan in one lump sum rather than stretching it out over months. Payday loans offer that option.
  • How fast do you need the funds? It’s possible to get a payday loan within a few hours. Installment loans take around one to two business days.

What do I need to apply for a payday loan vs installment loan?

Payday loans

  • Be the age of majority. You need to be at least 18 years old (19 in some provinces and territories).
  • Steady source of income. Many payday lenders can accept non-employment income such as Canada child benefit, employment insurance, disability and social assistance. Learn more about payday loans for government benefits.
  • Valid bank account. You’ll need to provide a voided cheque or fill out a pre-authorized debit form.

Before taking out a payday loan, become familiar with the payday loan regulations of your province.

Installment loans

  • Be the age of majority. You need to be at least 18 years old (19 in some provinces and territories).
  • Steady source of employment income. Although there are some lenders that accept non-employment income, many require employment income.
  • Meet the minimum credit score. This varies widely among lenders. Some lenders accept a credit score in the 300s or 400s, while others start in the 500s.
  • Valid bank account. You’ll need to provide a voided cheque or fill out a pre-authorized debit form.

Bottom line

Payday loans and installment loans from alternative lenders are both high-cost loans that are accessible to borrowers who don’t qualify for traditional loans from banks and credit unions. Before taking out a payday loan or installment loan, compare your options, understand the true cost of the loan and have a concrete plan to repay it.

Frequently asked questions

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Written by

Publisher

Leanne Escobal is a publisher for Finder. She has spent over 12 years working with financial products and services, specializing in content and marketing. Leanne has completed the Canadian securities course (CSC®) as well as the personal lending and mortgages course by the Canadian Securities Institute. She has a Bachelor of Arts (Honours) in English literature and creative writing from Western University. See full bio

Co-written by

Producer

Emma Balmforth is a producer at Finder. She is passionate about helping people make financial decisions that will benefit them now and in the future. She has written for a variety of publications including World Nomads, Trek Effect and Uncharted. Emma has a degree in Business and Psychology from the University of Waterloo. She enjoys backpacking, reading and taking long hikes and road trips with her adventurous dog. See full bio

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