Payday vs Installment Loans in UAE

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If an emergency strikes and your AECB score is poor, how can you get an emergency loan in UAE? 

You must have likely seen ads for lenders promising quick cash solutions, where you can get money in a flash without much paperwork. These are known as payday loans and installment loans. 

While both options can be tempting in a pinch, it is crucial to understand that they are not the same. Each one follows its own set of rules and repayment expectations. 

A Brief Overview of Payday Loans

A payday loan is a type of urgent cash loan online designed to be a quick solution for those requiring instant financial help. These loans are particularly useful if you need an emergency loan in UAE and have limited options due to poor credit or no credit history. The application process is simple and can often be completed entirely online.

Features of Payday Loans

  • Small loan amounts: Usually, payday loans offer amounts from a few hundred to a few thousand dirhams. As mentioned earlier, these loans cater to immediate and short-term needs.

  • Short repayment term: A payday loan is generally due on your next payday, which could be anywhere from 2 to 4 weeks away.

  • High-interest rates: Interest rates on payday loans are notably high, with APRs often reaching three digits.

  • Quick and easy application process: The application for a payday loan is simple and fast. Typically, the funds are disbursed within the same day or by the next business day.

 

How Payday Loans Work?

Let’s say you are in need of an emergency loan in UAE because your car broke down and you need it fixed immediately to get to work. You decide to take out a payday loan. 

Here is how it might work: 

You apply online and request AED 2,000 to cover the repair. The lender approves it swiftly and deposits the funds into your bank account. The agreement states that you must repay AED 2,300 on your next payday, which includes the original loan plus AED 300 in interest and fees. 

This quick influx of cash solves your immediate problem. But remember, the repayment date is just around the corner.

Risks Associated with Payday Loans

Payday loans come with some risks as discussed below-

  • High fees: The costs associated with payday loans can be steep. For instance, borrowing AED 1,000 might result in AED 300 in fees, leading to an effective APR of almost 400%.
  • Cycle of debt: Many borrowers are unable to repay their loans by the due date. Consequently, it pushes them to get additional loans, perpetuating a cycle of debt that is hard to escape.
  • Collections: If you are unable to repay, the lender might attempt to withdraw the owed amount directly from your bank account, which can result in additional bank fees. Failure to repay can lead to aggressive debt collection strategies that may affect your financial stability and credit Score.

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A Brief Overview of Installment Loans

An installment loan is a type of urgent cash loan in UAE where the amount borrowed is repaid over a set period in regularly scheduled payments. This loan usually involves fixed interest rates, which is great in terms of predictability throughout the repayment term. Installment loans can cover significant expenses and are common for financing big purchases like homes or cars.

Features of Installment Loans

  • Structured Payment Schedule: One of the most appealing features of installment loans is the predictability of their repayment schedule. As a borrower, you can know in advance the exact amount and number of payments.
  • Accessibility for Larger Amounts: These loans allow you to access larger sums of money. It can be crucial for covering costs like home repairs, medical bills, or new vehicles.
  • Fixed Interest Rates: Installment loans often have fixed interest rates, which means the payment amount does not change over the life of the loan.

How Installment Loans Work?

Suppose you need to buy a car in the UAE and decide to take out an installment loan for AED 50,000. After applying online and getting approval based on your credit score and financial history, you agree to repay this loan over 5 years with a monthly payment of approximately AED 1,000. 

This fixed sum includes part of the principal amount plus interest, spread evenly over 60 months.

Risks Associated with Installment Loans

  • Long-term Commitment: When you agree to an installment loan, you commit to making regular payments over a long period. This can become challenging if your financial situation changes unexpectedly.
  • Higher Overall Cost: Due to the interest rates and longer repayment terms, the total cost of an item purchased with an installment loan can be significantly higher than its cash price.
  • Risk of Default: If you face difficulties in making timely payments, there is a risk of default. This can severely damage your credit score and lead to harsh recovery actions by lenders.

 

Difference Between Payday Loans and Installment Loans

Check out the key differences between payday loans and installment loans-

Parameters

Payday Loan

Installment Loan

Meaning

A short-term borrowing option where funds are repaid on the next payday

Repaid over a set period through scheduled payments, generally monthly

Collateral Requirement

Generally, no collateral is required as these are unsecured loans

Collateral may be required for larger amounts (secured loans), but unsecured options are also available

Repayment Terms

Repayment is due in full on the borrower’s next payday, usually within 2 to 4 weeks

Repayment terms can extend from a few months to several years, depending on the loan agreement

Interest and Fees

Higher interest rates and fees, which can equate to high APRs

Lower interest rates compared to payday loans, with APRs more spread out over the term

Impact on AECB Score

Late payments or defaults can negatively affect the borrower's AECB score

Regular, on-time payments can improve or build a borrower's AECB score — defaults will negatively impact the score

 

How to Choose the Right Loan for You?

Here are some pointers to help you decide which type of online loan or urgent cash loan in UAE might be the best for your situation-

  • Determine how much money you need and for what purpose. If it’s a small amount that you can repay quickly, a payday loan might suffice. For larger amounts or longer-term financial needs, an installment loan is likely more appropriate.
  • Look at your budget and figure out how much you can afford to pay back each month. Payday loans require a full repayment by your next payday, which can be a challenge if you are not prepared. Installment loans, on the other hand, spread the payments over time, which may be easier on your budget.
  • Payday loans have higher interest rates and fees. It makes them more expensive in the long run. On the other side, installment loans often come with lower rates.
  • Consider how long you will need to pay back the loan. A shorter loan term generally means less interest paid overall, but the payments will be higher. Choose a term that offers manageable payments without stretching your finances too thin.
  • If you are looking to build or maintain your credit score, an installment loan might be a better choice. Consistent, on-time payments on installment loans can improve your credit score.

If you are still uncertain about which loan is right for you or simply wish to explore additional personal loan options, just visit Policybazaar.ae

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