Is a Payday Loan an Installment Loan or Revolving Credit?

A payday loan is neither an installment loan nor revolving credit. It is a short-term, lump-sum loan that must be repaid in full on your next payday, usually within two to four weeks.

Installment loans are repaid in scheduled payments over months or years. Revolving credit lets you borrow, repay, and borrow again up to a limit. Payday loans do neither. You borrow a fixed amount, pay it all back at once, and must apply again if you need more money.

Below, we break down exactly how payday loans compare to installment and revolving credit, with real cost examples and better alternatives.

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:

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, fees typically range from $10 to $30 per $100 borrowed, with $15 per $100 being the most common charge. On a typical $350 loan, that means paying back more than $400 in just two weeks. The CFPB estimates that about 12 million Americans take out payday loans each year, and 80% of payday loans are rolled over or followed by another loan within 14 days.

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

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.

Now that we've covered installment loans, let's look at the other side of the question: is a payday loan revolving or installment? It's not revolving credit either. Here's why.

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 (about $3.50 at 21% 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.

If you're considering a payday loan, you likely need cash fast. But the high cost of payday loans (often 300-400% APR) makes them one of the most expensive ways to borrow money. Here are options that may cost you far less.

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