Wise Loan offers credit-building installment loans that can help you get the cash you need for emergencies or other unplanned expenses even if you don’t have a great credit score. A lot of payday loan products are marketed in a similar manner, so what’s the difference between a Wise Loan and a payday loan? And why would you choose one over the other? Find out more below.
What Is the Difference Between a Loan and a Payday Loan?
A payday loan — which is often referred to as a payday advance, cash advance loan or a salary loan — is a short-term, small amount loan that a borrower repays at their next payday.
The amount you pay back is the amount you borrow plus a fee. For example, if you borrow $200 from a payday loan company that charges $20 for every $100 borrowed, you must pay back $240.
Most payday loan lenders require you to set up an automatic payment from your checking account. They electronically deposit the funds for your loan into the checking account and then automatically withdraw the funds for the repayment at the agreed-upon time.
Payday loans differ from more traditional installment loans in their terms. With an installment loan, you don’t pay the amount plus fees back right away with your next paycheck. Instead, you pay the amount you borrow plus interest over a period of time in a series of installments. Installments may be paid weekly, biweekly, or monthly, depending on the terms you agreed to with your lender.
What Is Better: a Payday Loan or an Installment Loan?
Installment loans, such as those available through Wise Loan, are typically a better choice than payday loans. Here are just a few reasons you might want to go with an installment loan when looking for short-term cash to meet an unexpected need:
- Potentially better interest rates. Payday loans have extremely high interest rates. Many people don’t realize this because of the way the loans are structured. They have a “fee,” and payday loan lenders may not use the term interest. But when you’re being charged $10 to $30 per hundred you borrow and expected to pay that back within a few weeks, the resulting interest rate can reach more than 600%.
- Access to higher amounts. Payday loan amounts are based on how much you can pay back on your next payday. That limits how much you can borrow, as most lenders won’t even let you borrow the total amount of your paycheck. Installment loans are based on how much you can afford to pay back over a longer period of time, which may make it possible for you to borrow more money.
- Helps build your credit. If you work with an installment loan lender that reports to the credit bureaus, your loan can help you build credit for the future. Making timely payments on your loan increases your positive payment history, which in turn can increase your score. Many payday loan lenders don’t report your payments to the credit bureaus, so such loans don’t help you build credit.
Are Payday Loans Easier or Harder to Pay Back Than Installment Loans?
Payday loans tend to be harder to pay back because they require a substantial amount out of your next paycheck. If you are relying on a payday loan to make ends meet, your next paycheck may also be stretched. Having to use it to pay back the loan can put you back in a financial bind a few weeks from now.
An installment loan requires smaller payments over a longer period of time. That structure helps you pay back the debt without creating that financial burden in immediate weeks.
Why Should You Avoid Payday Loans?
Some people get caught up in what’s known as the payday loan trap. This occurs when you take out a payday loan for an unplanned expense and intend to pay it back fully on your next payday. But something else happens in the meantime and you need your entire next paycheck to make ends meet.
Many payday loan companies let you roll the existing loan into a new one, putting off paying it back until your next payday. Of course, they don’t offer this courtesy for free. You pay a rollover fee, increasing the amount you have to pay back (and the interest on your loan). You may also make it that much harder to pay back the loan without major financial issues in your personal budget.
The Wise Loan Difference
Wise Loan works to provide responsible lending solutions that help you access the cash you need while setting you up for a more successful financial future. You don’t need great credit to qualify for our loan products.
Your installment loan is paid back over a series of months to make them easier to fit into your budget. We also have a number of resources to help you pay the loan back on time, allowing you to improve your credit score and rewarding you for doing so!
If you need fast cash for an urgent or unplanned expense, consider a loan from Wise Loan instead of a regular payday loan. You can apply online in minutes to find out if you qualify.
Frequently Asked Questions
What are two types of payday loans?
Payday loan companies offer a few options, including:
- Paycheck advance loans. You secure these loans based on your next paycheck. The lender takes the money out of your bank account on payday.
- Post-dated check loans. You write a check for a certain day in the future to cover the loan plus any fees. The lender gives you the money now and cashes the check on the agreed-upon date.
What is considered a payday loan?
“Payday loan” is a term that is used for a wide range of loan solutions. You may even hear loans from Wise Loan referred to as payday loans. But in most cases, when people say “payday loan,” they mean a loan for $500 or less that must be paid back on or before the next payday (or within a few weeks or a single month).
Does Wise Loan report to credit bureaus?
Yes, Wise Loan reports payments to two of the three major credit bureaus. We want to help our customers build credit. If you pay your Wise Loan as agreed, you can be sure that positive payment history will be added to your credit report.
The recommendations contained in this article are designed for informational purposes only. Essential Lending DBA Wise Loan does not guarantee the accuracy of the information provided in this article; is not responsible for any errors, omissions, or misrepresentations; and is not responsible for the consequences of any decisions or actions taken as a result of the information provided above.