Key takeaways
- Payday loans are due in one lump sum in about two weeks; installment loans are repaid in scheduled payments over months or years.
- Installment loans from banks and credit unions are usually far cheaper than payday loans.
- High-cost installment loans can carry triple-digit APRs and cost more in total dollars because you pay for longer.
- Compare the total amount you will repay, the APR and whether the payment fits your budget, not just the payment size.
In this guide
The main difference is repayment: a payday loan is due in one lump sum, usually in about two weeks, while an installment loan is repaid in fixed payments over several months or years. Installment loans from banks and credit unions are generally much cheaper, but high-cost installment loans can cost more in total because you pay for longer.
So "installment loan" is not automatically the safe answer. The label covers everything from a low-rate credit union loan to an online loan with a triple-digit APR. The useful comparison is total cost, payment affordability and how each loan handles the risk that you can't pay on time.
How payday loans work
A payday loan is a small, short-term loan, often a few hundred dollars, that comes due on your next payday. The lender charges a fee per $100 borrowed and collects repayment with a post-dated check or an automatic debit from your bank account. If you can't repay in full, many lenders let you pay the fee and extend the loan, starting the cycle again. Our explainer on what a payday loan is covers the basics, including how renewals work.
How installment loans work
An installment loan gives you a lump sum up front, which you repay in equal, scheduled payments (installments) that include both interest and principal. Common types include:
- Personal loans from banks, credit unions and online lenders
- Payday alternative loans (PALs) from federal credit unions, designed as a lower-cost substitute for payday loans
- Auto loans and mortgages, which are secured installment loans (see how auto loans work)
- High-cost or "payday installment" loans from some storefront and online lenders
With each payment, your balance goes down. When the last payment is made, the loan is paid off. Because the schedule is set in advance, you know on day one exactly how much you will pay each month and when the debt will end, which makes budgeting far easier than with a loan that demands the full balance at once.
That predictability is the core structural advantage over a payday loan. A payday borrower who is short on the due date faces a stark choice between paying everything, paying a fee to extend or defaulting. An installment borrower who is short usually faces a single smaller payment instead.
Installment loans vs payday loans: side-by-side
| Feature | Payday loan | Mainstream installment loan | High-cost installment loan |
|---|---|---|---|
| Typical amount | A few hundred dollars | Hundreds to tens of thousands | Hundreds to a few thousand |
| Repayment | Lump sum in about two weeks | Monthly payments over months or years | Payments over months, often tied to paydays |
| Cost | Fee per $100, often a very high APR | Lower APR based on credit | APR can be triple digits |
| Credit check | Usually no major-bureau hard pull | Usually a credit check | Varies; often looser |
| Credit reporting | Usually none unless in collections | Commonly reported | Varies |
| Main risk | Rollovers and repeated fees | Missed payments hurt credit | Long term raises total cost |
Which costs more? A worked comparison
The APR on a loan tells you its annual cost, but the total dollars you repay also depend on how long you borrow. That's why a lower APR over a long term can still add up.
The lesson: a low-cost installment loan usually beats a payday loan by a wide margin. A high-cost installment loan might make each payment smaller while making the total bill larger. Always look at the "total of payments" figure the lender must disclose.
Pros and cons of each
Payday loans
- Pros: quick, small amounts, minimal credit requirements
- Cons: very high cost, lump-sum repayment that is hard to meet, rollover risk, usually no credit-building benefit, not available in some states
Installment loans (mainstream)
- Pros: lower APR, predictable payments, time to repay, often reported to credit bureaus
- Cons: usually a credit check, may take longer to fund, late payments can hurt your credit
High-cost installment loans
- Pros: smaller payments than a lump-sum payday loan, easier approval
- Cons: very high APR, long term increases total cost, may include add-on products or fees, refinancing offers can extend debt
How state rules affect both
Payday and small-dollar installment loans are regulated largely at the state level. Some states cap rates in a way that effectively rules out payday loans; others permit them under specific fee rules. Some states regulate short-term installment loans separately, with their own rate caps or term limits. Our guide to payday loan laws explains how the rules vary. Always confirm a lender is licensed with your state financial regulator before applying.
How to choose the safer option
Ask these questions before you borrow:
- Can I repay the full amount on my next payday without borrowing again? If not, a payday loan is likely to turn into a rollover.
- What is the total I will repay? Compare total of payments, not just the monthly or biweekly amount.
- Does the payment fit my budget after essentials? Plan for rent, utilities, food and transportation first.
- Is the lender licensed in my state? Check with your state regulator.
- Is there a cheaper source? A credit union PAL, an employer advance or a payment plan with the biller may cost less than either loan.
For small, short gaps, some people also compare earned wage access and cash advance apps; see cash advance apps vs payday loans. For more ideas, our list of payday loan alternatives covers options such as payday alternative loans from credit unions.
The bottom line
Installment loans spread repayment over time, which usually makes them more manageable than a payday loan's lump-sum due date, and mainstream installment loans are typically far cheaper. But high-cost installment loans can carry payday-like APRs over a longer term, so the total bill can be bigger. Compare the APR and total of payments, confirm the lender is licensed and check lower-cost alternatives first.
Frequently asked questions
Is an installment loan better than a payday loan?
Often, yes. An installment loan from a bank, credit union or reputable lender usually has a much lower APR and gives you months to repay, which reduces the risk of rolling over. But some online installment loans carry very high APRs, so a long term can mean paying more in total. Compare APR and total repayment before choosing.
Do installment loans build credit?
Many installment lenders report payments to one or more of the major credit bureaus, so on-time payments can help build credit and late payments can hurt it. Most payday lenders do not report to the major bureaus. Ask any installment lender whether and where it reports before you borrow if building credit is a goal.
Can you get an installment loan with bad credit?
Yes, but options and costs vary widely. Credit unions sometimes offer small loans, including payday alternative loans, to members with limited or damaged credit. Online lenders that advertise bad-credit installment loans may charge very high rates. A co-signer or secured loan can sometimes lower the cost.
What is a payday installment loan?
A payday installment loan is a high-cost loan repaid in several payments, often tied to your pay dates, rather than one lump sum. It can make each payment smaller than a traditional payday loan, but APRs can remain very high and the longer term can raise the total cost. Some states regulate these loans separately from payday loans.
Official Resources & Further Reading
Use these resources to check current guidance. Requirements and availability may vary by state and provider.
This guide is for general educational purposes and is not individualized financial, legal, tax or insurance advice. Product terms, rates and availability vary by provider and location. How we make money.
