Payday Loan Classification: Installment Loan or Revolving Credit?

Payday loans are neither installment loans nor revolving credit.

So, what type of credit is a payday loan? They occupy a unique category of short-term, high-cost loans with their own distinct structure and repayment terms.

Let's explore the nature of payday loans and how they compare to installment and revolving credit options.

What Type of Credit is a Payday Loan

Payday loans are a specific type of short-term, high-cost loan, designed to be repaid in a single lump sum on the borrower's next payday, typically within 2-4 weeks.

The key characteristics that define payday loans include:

• Short repayment term: Usually 2-4 weeks, until your next payday

• Lump sum repayment: The full loan amount plus fees is due all at once

• Small loan amounts: Typically $500 or less

• High fees: Often $10-$30 per $100 borrowed

• No credit check required: Approval is based on income and bank account verification

• Post-dated check or electronic access: Borrower provides authorization for automatic withdrawal on due date

Payday loans are designed as a short-term "bridge" to help cover emergency expenses until the borrower's next paycheck. However, their high fees and short repayment terms often lead to a cycle of reborrowing.

According to the Consumer Financial Protection Bureau, the median payday loan fee is $15 per $100 borrowed. They can be also a quick fix or a credit trap, depending on how you use them.

Payday Loan vs Installment Loan

Installment loans are a type of credit where you borrow a lump sum and repay it in fixed, regular payments (or installments) over a set period. These loans can range from a few hundred dollars to tens of thousands, with repayment terms typically spanning several months to a few years.

Common examples of installment loans

• Personal loans

• Auto loans

• Mortgages

• Student loans

Now you know what type of credit is a payday loan and how installment loans work. To better understand how payday loans differ from installment loans, let's compare them directly.

It's important to note that installment loans is a broad category. It includes many different types of credit, such as personal loans, car loans, and mortgages. Because of this, the terms and conditions can vary significantly.

Always explore all your options and carefully consider all the variations before taking out any loan.

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Payday Loan vs Revolving

Let's also break down the differences between payday loans and revolving credit. We've already covered payday loans, so let's start with a quick explanation of revolving credit.

Revolving credit is a type of credit that allows you to borrow money up to a certain limit, repay it, and then borrow again.

The most common example is a credit card. You have a credit limit, and as long as you're under that limit, you can keep using the card, paying off some or all of the balance each month.

Now, let's compare these two types of credit:

Here's an example to illustrate the difference:

Let's say you need $300 for an emergency car repair.

With a payday loan, you might borrow $300 and owe $345 in two weeks (assuming a fee of $15 per $100). You must repay the full $345 on your next payday or risk additional fees and potential legal action.

With a credit card (revolving credit), you could charge the $300 repair. If you pay it off in full when the bill comes, you'd owe no interest. If you can only afford to pay $100, you'd carry a $200 balance and owe interest on that amount (let's say $3 at 18% APR). You could then continue making payments over time.

For those with poor credit who might not qualify for traditional revolving credit, secured credit cards can be a good alternative. These require a cash deposit as collateral but can help you build credit over time.