Is a Payday Loan Installment or Revolving ?

Among the most often used short-term cash advances are payday loans, which also have somewhat high interest rates and costs connected with them. Two general types of consumer loans exist line of credit and installment loans. Payroll loans must be classified as either revolving or installment loans.

What are Installment Loans?

With an installment loan, the lender lets the borrower get cash in one big amount at the loan start. Subsequently, fixed installments over a designated term recoup the actual loan amount plus the interest levied on the loan. Among the most often used loans are personal loans, auto loans, and house loans; installment loans are those that are paid off in equal payments.

Key features of installment loans:

- A loan amount that remains constant or one that is offered at the time of borrowing.
- There is a fixed number of equal payments made over a specified period in a loan repayment process.
- Installments include the actual amount borrowed and the interest that a borrower has to pay.
- The interest rate is not changed throughout the time spent on repaying the loan.
- Fully amortizing – The payment of the total amount of the loan is made through the final payment.
- If payment is made after the due date then the cashier will have to pay extra charges.
- Examples: The subprime category consists of personal loans, auto loans, and mortgages.

Is there anything known as Revolving Lines of Credit?

In a revolving line of credit, the borrower obtains a particular credit maximum but can only borrow to that limit but can borrow in installed amounts less than the maximum. It is cheaper than a traditional loan where the borrower pays interest on the principal amount as well as the part used. It can be borrowed in any amount that the borrower desires at the time of borrowing without necessarily having to borrow the total amount granted by the credit facility.

Key features of revolving lines of credit:

- Has a maximum credit limit, yet borrowers can borrow as little or as much as they want although they cannot exceed the limit.
- Responsible for paying only interest on the amount borrowed or the funds that have been utilized.
- It means, that as money is returned target consumer credit limit is refilled again.
- Revolving credit with active terms to draw on as needed and repay as needed
- Some may have minimum monthly payments even when the balance used that month is nil
- Instead of being fixed, interest could be a variable.
- If the minimum payment is not made then there might be a possibility of getting charged late fees or even higher rates of interest.
- Examples: Credit cards Home equity lines of credit (HELOCs)

Is Payday Loan Considered Installment or Revolving?

Technically it is not an installment loan and it is not a revolving loan either, but it holds characteristics of both. However, they have some similarities to installment loans in the sense that they also involve making regular payments on the borrowed amount over some time rather than paying the total amount at once.

Here's why:

- Lump sum amount provided upfront: Payday loans offer the entire required loan amount in a single installment payment known as a lump-sum payment. This is like an installment loan, with a specific amount paid in a fixed time like weekly or monthly, for a set duration.

- Set repayment schedule: Payday cash advance loans operate similarly to a typical payday loan where a fee is charged and a full repayment is expected from the borrower’s next salary. Thus, they have a fixed date for repayment of the particular type of credit, which mirrors the borrower’s pay date rather than an indefinite revolving credit.

- Fully amortizing: Payday loans are a powerful tool aimed at the next paycheck since each subsequent payday loan is expected to be paid off in full. They are therefore closer to an installment loan that amortizes over the due period rather than an open-ended credit arrangement.

However, there are also some key ways payday loans differ from typical installment loans:

- Very short repayment term: Installment loans usually have a monthly or even annual repayment period while the payday payment period could be days or weeks before the next payday.

- Extremely high interest rates: Payday loan annual percentage rate is as high as nearly 400% of an average price. Simple and complex installment loans have single and double-digit interest rates.

- Rollover options: Installment loans are repaid in equal monthly installments and have a definite maturity, while payday lenders keep pushing the loan beyond the pay cycle or encouraging the borrower to refinance. This makes the due date an ‘open’, ‘revolving’, or ‘rolling’ date akin to a revolving loan.

- No credit check: Installment lenders run a credit check on the borrower and consider whether they will be capable of paying back the money. These loans normally do not ask for too many formalities, and one just needs to prove that he/she has a source of income and a checking account.

The Takeaway

Even though payday loans are technically similar to installment loans, because of their extremely high fees, short payback period, and LVGRAs that encourage borrowers to roll over loans to the following week, they may prove to be a highly hazardous form of credit. The absence of underwriting also implies they may not factor in whether the borrower will have the ability to repay the cash advance without incurring on to another loan. Even though legal and permitted in several states, payday loans, however, remain prohibited and confined to caps in other states.