Whilst instalment loans may often appear a more expensive way of borrowing when compared to payday loans they could help avoid the payday loan trap that so many borrowers fall into and hence could actually save on the cost of borrowing for a great many people.
A traditional payday loan is designed to bridge the gap until the next payday, it’s specifically designed for those months when an unexpected cash flow problem hits for whatever reasons such as car maintenance, unexpected travel costs, heating repairs etc. Borrow a small sum of money, pay it back on payday and that’s it! However, what more and more people are finding is that they are taking out a payday loan to tide them over, paying it back and finding themselves short the following month and so bridging the gap with another payday loan and hence falling into the start of the payday loans trap – relying on borrowed money each month.
An instalment loan provides the same solution for a cash flow problem however, the big difference is that instead of paying back in one lump sum plus interest on a date to coincide with the next payday, repayments can be spread over an agreed period, several months or even years in some cases, thus minimising the monthly cash flow impact to the borrower and avoiding the dreaded monthly loan trap.
The typical duration of a payday loan is between 30 and 40 days, some companies will lend over a shorter period too, the actual repayment date will be set to coincide with payday. This is fine if your borrowing is a genuine one off and the full repayment of the loan is affordable without any need to plug another gap the following month. A typical short term instalment loan enables repayment to be spread over a 4, 6 or in some cases, 12 month period.
Costs will vary from lender to lender however all lenders are now required to display a representative example showing the interest rate, APR, total repayment cost and charge for credit which will enable the borrower to decide on the most cost effective solution for their own particular circumstance. A payday loan of £200 borrowed over a 30 day period may cost around £50 in interest and hence a payment of £250 needs to be paid back in full and in a single payment – do the same again the following month and the month after that £200 has now cost £150 and you’re still short of cash the following month! Interest rates on instalment loans may vary quite considerably as can repayment terms but these representative examples can be used to initially compare costs and to work out the best way of borrowing for each individual situation.
So, if you need a quick cash flow fix then it’s important that you look at the longer term implications of taking out a payday loan – think about the effect on cash flow the following month and the month after that and then consider the instalment loans alternative … it could be cheaper in the long term.