Payday Alternatives: How Responsible Short Term Loans Companies May Offer Better Installment Plans

Unexpected expenses are a common part of financial life. A medical bill may arrive without warning. A car repair may be unavoidable. A business emergency may disrupt an otherwise balanced budget. In these moments, many borrowers look for short-term credit. Payday loans are often visible and easy to access.

However, their structure and costs lead many consumers to explore alternatives. In recent years, short term loans companies have introduced installment-based products. These loan products differ in structure, repayment terms, and disclosures.

This article explains how these installment plans work. It also outlines how responsible short term loans companies position them as an alternative to payday loans.

Understanding Payday Loans and Why Borrowers Look Elsewhere

Payday loans are funding designed for those who run out of cash early because of unexpected financial strain. Usually, they will need to pay back their payday loan on their next pay check. Generally, they are for small amounts .Based on data provided by the Consumer Financial Protection Bureau (CFPB), payday loans often carry high-interest rates. The average annual percentage rate (APR) of payday loans is approximately 400%.

Payday loan borrowers often face repayment issues due to the structure and timeframes of the loan. All funds owed must be paid back at once. Failure to repay in full causes the borrower to accrue fees that quickly build up, and if repayment is not completed, additional fees or ‘rollovers’ are charged. According to CFPB statistics, borrowers often take out subsequent loans shortly after repaying their first loan, with roughly 80% of payday loans being followed by another payday loan within 14 days.

These patterns of borrowing prompt many borrowers to look into exploring installment-based short-term loans offered by short term loans companies.

What are Installment-Based Short-Term Loans?

Installment small business loans mainly differ from payday loans in structure. Instead of making a single lump sum repayment, the borrower repays the loan in fixed installments. These payments are spread across a defined loan term.

Responsible short term loans companies typically outline:

• A fixed schedule of monthly payments

• Clearly defined terms of repayment

• An easy to understand breakdown of interest rates and fees

The total loan amount of an installment loan is usually higher than that of a payday loan. The term can range from months to several years. In many cases, these loans are generally unsecured, meaning the customer does not put up any collateral.

Though they can also be short-term loans, the repayment process for this type of loan is quite different from that of payday loans. This difference affects how the customer budgets and manages their cash flow.

How Responsible Short Term Loans Companies Structure Installment Plans?

Responsible short term loans companies often focus on predictability. When borrowing from these types of lenders, the borrower understands what their monthly payment will be at the time of obtaining the loan. The loan agreement outlines the loan's interest rate and term along with the total amount to be repaid.

Key features often include:

• Fixed rate interest instead of variable pricing

• Defined term length

• Scheduled installments withdrawn from a checking account or bank account

Some short term loans companies require borrowers to have a savings account or a checking account. In addition to the above requirements, to apply for a short-term loan, the borrower should have a good credit history.

Although not all short term loan providers follow a specific standard, it is best to compare offers and their terms prior to proceeding to apply for a loan. This is because many variables affect this decision, which include the state you live in, lender policies, and creditworthiness of the borrower.

Comparing Costs

Examining the costs of borrowing is a significant consideration in making a borrowing choice. The costs involved in borrowing need to be evaluated according to the situation.

Fee Structures

While payday loans utilize a flat fee system, installment loans utilize interest that accumulates over time. Installment based loans may also charge origination fees in addition to that interest.

All lenders have to disclose the following based on the requirements placed upon them by the Federal Trade Commission (FTC):

• The rate of interest that they charge

• The APR on the loan

• The amount of fees charged by the lender

APR and Interest Rate Differences

While APR is generally a more accurate depiction of how much it will cost to take a loan, it encompasses both the cost of interest and any other fees associated with it. An installment loan can have lower APR's than a payday loan because of the longer loan repayment period. However, the total cost depends primarily upon the repayment period chosen by the borrower.

Borrowers should review the following factors when choosing a lender:

• Annual Percentage Rate

• Total Amount Due

• Amount of the monthly payments

Repayment Term Impact on Financial Burden

The repayment terms affect a consumer's ability to budget. A short repayment term can typically strain a business owner’s cash flow. It can create a greater burden if compared to longer, extended or installment period repayment plans as the payments can be distributed over more time than if all were due at once. Short term loans companies, however, may frequently allow borrowers additional time to repay the loan amount making it more manageable.

A longer term may usually result in an overall increase in the amount of interest paid. Therefore, consumers should compare the costs of the repayment versus the amount of repayment flexibility to determine which is better for their business.

Credit Checks, Credit Scores, and Reporting Practices

Credit checks, credit scores, and credit reporting practices vary among loan providers. Some short-term loans companies conduct hard credit checks while others utilize alternative methods to conduct credit checks. Hard credit checks may have a temporary negative impact on an individual's credit score.

Installment loan providers typically report to the three major consumer credit bureaus. When an individual makes a payment on time, the payment will typically be reported to the credit bureaus. When a payment is late, it can negatively affect an individual's credit history. A payday loan generally does not affect an individual's credit score. However, an installment loan may positively or negatively affect an individual's creditworthiness depending on how the lender reports to the credit bureaus.

Alternative Financing and Loan Options

Short term installment loans are one of many loan products offered by short term loans companies. There are other financing solutions as well that business owners can explore and choose based on their situation and business requirements.

Other financing solutions include:

• Personal loans

• Business credit card

• Secured loans

• Business line of credit

• Debt consolidation loans

• Merchant Cash Advances (MCAs)

Debt consolidation loans combine multiple debts into one payment. They may have lower interest rates depending on credit score and credit history.

Credit unions and banks also offer loan options. Many are member FDIC institutions or NCUA-insured.

Every lender has its own eligibility requirements for qualifying for financing, and therefore each borrower must compare all lenders with respect to their loan terms as well as all financial services provided.

Application Process and Loan Funding Timelines

The application and funding process varies based on the type of lender you choose. Most short term loans companies offer an online loan application process.

While the exact steps may vary, most applications follow these basic procedures:

• Submitting your personal and financial information

• Authorize a credit check

• Review your loan offer

• Sign the loan agreement

Loan approval timelines vary widely. However, actual loan funding depends on verification and business day processing.

Loan proceeds are often deposited into a bank account. Therefore, some lenders require an active checking account for the convenience of automatic payments.

Consumer Protections and Regulatory Oversight

Short term loans are regulated at either the federal level or state level. The Consumer Financial Protection Bureau (CFPB) provides oversight to many short-term loan companies. Limits may be set on the APR or loan terms depending on the laws of the individual state.

The Truth in Lending Act provides consumers with clear and concise disclosure of the information that they need to understand their credit options. The act states that borrowers must receive standardized information before being approved for credit.

With the help of the CFPB's Complaints Portal, consumers may submit complaints about lending practices.

Risks Associated with Short-Term Borrowing

Any short-term loan carries a level of risk. Therefore, when evaluating and looking for the best short term loan lenders, borrowers should take into account the following factors:

• Ability to repay

• Impact on credit report

• Possibility of Late Payments

Increased costs of borrowing due to very high interest rates. Late payment penalties and damage to credit due to missed payments.

Short-term loans can be used to fulfill immediate financing requirements, such as emergencies. They may not be suitable for long-term financial solutions.

When Short Term Loans Are Often Considered

Borrowers often consider short term loans for some of the following reasons:

• Medical bill expenses

• Cash flow gaps

• Equipment purchases and repairs

• Unexpected expenses

In these scenarios, some of the best short term loan companies may offer structured repayment options. All borrowers must take into consideration how much of a payment they can afford prior to committing to a loan.

Conclusion

To make an informed decision about choosing among short term loans companies, borrowers should consider all available options and evaluate which option meets their needs best. Each type of loan has different features and specific uses. For example, a payday loan may be used for quick cash flow needs or day-to-day expenses, while an installment loan is generally a longer term loan and used to finance larger purchases with a fixed repayment amount each month.

By reviewing the terms of each loan option (estimated annual percentage rate (APR), total cost of the loan), potential borrowers may be better prepared to make an informed decision about whether or not to take out a short-term loan. In addition, knowing how the loan will impact your credit history and determining if you can afford the loan before you take it out helps ensure that a loan fits within your overall budget. All financial situations are unique and, therefore, informed decisions may ultimately lead to improved financial outcomes over the long run.