Many Canadians found they could not qualify for a traditional loan when they needed it during the pandemic. More than 25% of those surveyed had to take out a payday or installment loan to meet basic needs. These are high-interest loans that lenders offer as a service for those who need cash fast and must pay back in a relatively short time.
However, what is the difference between a payday and an installment loan? Below are the fundamental differences.
Amount
Payday loans have a limit of $1,500 in most provinces in Canada and must not exceed 50% of your monthly income. Some lenders allow first-time borrowers up to $500 for 30 days, after which you must pay the loan amount plus interest in full. The limit gradually increases for repeat customers.
Installment loans have no such limit by law. You can borrow as much cash as you need, subject to the limitations set by the lender. Some offer up to $15,000 for up to 60 months. Unlike payday loans, you don’t have to pay back the total amount in one go but through installments.
Interest Rate
The interest rate for payday loans depends on the province. In Ontario, licensed lenders cannot charge more than $15 per $100. The annual interest rate of payday loans comes out to about 400%.
Most people don’t feel it because payday loans are short-term. In Ontario, for example, the law says that payday loans should not exceed more than 62 days. The most you pay for a $300 loan is $200 in interest.
On the other hand, installment loans have an annual interest rate of not more than 60%, including fees and costs. The interest rate will depend on your income, credit score, and other factors. The loan term can be as long as 60 months with some lenders.
However, if your interest rate is 60% per annum over five years, you will pay 360% in interest. We recommend borrowing only as much as you need for as short a term as you can manage. There are installment loans that can be as low as $1,000 for a period as short as six months.
Requirements
Qualifying for either a payday loan or an installment loan is easy. You need to be a Canadian resident over 18 with a valid email and Canadian bank or credit union account. You also need to provide a home or mobile number, physical address and proof of income.
The main difference is the interest rate. Payday loan borrowers pay the same interest rate. Installment loan borrowers may qualify for a loan at different interest rates, depending on their credit score.
Choose the Right Loan Type
You should choose a payday loan if you only need a small amount over a short period. Get an installment loan if you need more than $1,500, and you cannot pay it back all at once. In either case, be sure to read the loan agreement carefully. Remember that most provinces provide a cooling-off period.
Both payday loans and installment loans are high-interest loans. You should only consider them if you cannot qualify for traditional loans or need cash fast. A sudden illness, temporary cash-flow problem, or urgent home repairs are good reasons to get one or the other.
You should also apply for a payday or installment loan only with a licensed lender like GoDay in your province. A highly reputable lender, GoDay services Canadians from coast to coast.
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