Life is full of surprises, which occasionally include an unexpected expense! But not to fear, Moneytree has your back! Before you give up on your budget, consider some options that may help you get over a bump in the road without derailing your financial plans.
Surprise Expenses are Stressful!
No one expects that they will never need a car repair, have to buy new tires, or need to see the doctor. These life events are “expected” – the trouble is that you don’t know when they will happen and sometimes they happen when you don’t have immediate cash to pay for them. A lot of the stress of an unexpected expense is not that you won’t have the income to cover the cost – it is that you don’t have the income right now. If you think about it, overdraft protection is a way of paying for expenses that a person has now, with income he will receive later. But overdraft protection can be expensive (sometimes up to $35 per check or debit to the account) and some people don’t have or want overdraft protection. A consumer loan is a lot like overdraft protection and these loans are often a less expensive, more flexible and manageable option.
Types of Consumer Loans
So what is a consumer loan? A consumer loan is a loan that an individual can obtain to use primarily for personal, family or household purposes. The fees on these loans can be a flat fee (e.g. $15 per $100* borrowed – no matter when it’s paid back) or they can accrue interest at regular intervals (e.g. daily). Some types of consumer loans may be a combination of both a flat fee (e.g. an origination fee) and provide for interest to accrue on a regular basis.
Payday loans are typically structured as flat fee loans repayable in one lump sum and with a shorter term that is based on the borrower’s next expected pay day or income event. Installment loans are typically repaid in multiple payments over a longer period of time, and (while not always) typically accrue interest over time.
How to Decide?
Now that we’ve got the consumer loan basics under our belts, you may be asking yourself – which type of loan is better? Answer: It depends!
Payday and installment loans are like apples and oranges. Both types of fruit grow on (Money)trees, but each one tastes totally different, and each person picks their favorite. Both product options get you cash in hand, but each type is paid back differently. Which loan will work best for you depends on your budget, income, expenses, and how much money you need to borrow. Here’s the short and sweet (like fruit, get it?) on each loan option.
A payday loan is short term, and payable in one lump sum. For these reasons, this type of loan appeals to people who have a short term need that they expect to be able to repay the next time their payday rolls around. They also have a flat fee – so there’s no guessing about “how much will I have to repay?” For this reason, payday loans often appeal to folks who like certainty and don’t like long-term debt.
Example: You’re $100 short on rent because your car needed repairs this month. You opt for a payday loan because you don’t want to be late on rent and end up with a late fee. You also will know the exact cost for the loan. Typically, payday loan fees are based on the amount borrowed and range between $15-$22 per $100* depending on the state in which you live and the company you choose. By next payday, you’ll have the ability to pay back the loan in full, your rent is paid on time, and no bussing to work is needed – it’s a win-win situation!
Installment loans may be more appropriate when you need more money and more time to repay. Installment loans are repaid over time, like a home mortgage or car payment. They require regular payments, but because they are spread out over time, payments may be smaller than the lump sum payment of a payday loan and therefore are managable on a budget. Installment loans typically accrue interest on a regular schedule and can typically be repaid early without a penalty (did someone say “control the amount of interest you pay?”).
Example: Your water heater is busted, and the idea of a cold shower just doesn’t sound appealing, brrrr! Since water heaters aren’t cheap, you take out an installment loan to cover the cost so you’re not showering in the cold while you save up the money for a new one. You make your loan repayments over several months. Hot showers and a healthy bank account – hooray!
So, the next time your car sputters to a stop, your cat Clementine catches a cold, or your family needs some extra cash flow, you’ll be more prepared to make the loan choice that’s right for you! Do you have a specific need in mind already (can’t forget about that quiceañera!)? Check out our website to find out whether a payday or installment loan is available in your state.
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* Washington Payday Loan: A payday loan costs $15 per $100 borrowed up to $500, and $10 per $100 on the amount over $500. For example, a $100 loan due in 14 days would have a total repayment amount of $115 and has an APR (Annual Percentage Rate) of 391.07%^.
^ The Annual Percentage Rate (“APR”) is the cost of your loan expressed as a yearly rate. The actual APR for your loan may be higher or lower, depending on the actual amount you borrow and your actual repayment schedule.