Short-Term Loans vs. Payday Loans: What’s More Profitable for Lenders?

A long-time Bryt Software customer recently asked: 

“Bob, we’re considering expanding beyond our current product offerings. With your visibility across different lending models, do you see higher profitability in short-term installment loans or payday products?”

This question may seem simple, but it represents a major decision that affects millions in potential revenue. Since starting Bryt Software in 2017, I’ve worked with lenders using both models across many states and regulatory environments.

I’ve noticed that no single model works best for everyone. The most profitable approach depends on your specific business strengths, market conditions, and comfort with risk. A model that brings strong returns to one lender might cause losses for another operating differently or in a different state.

In this article, I’ll examine what drives profits in both loan types, including operating costs, default patterns, long-term customer value, and regulatory requirements. This will help you make a fact-based decision about which model (or mix of both) will work best for your business in today’s lending market.

Before analyzing profitability factors, I want to clarify the fundamental differences between these two lending models based on my experience working with lenders across the industry.

Short-Term Installment Loans

Short-term installment loans have several distinct characteristics that impact lender operations:

• Portfolio composition typically includes loans of $500-$5,000, allowing higher revenue per transaction.
  
  
• Loan terms of 3-24 months create longer asset duration and extended revenue streams.
  
  
• Multiple payment touchpoints (bi-weekly or monthly) allow for gradual principal recovery and ongoing interest generation.
  
  
• Revenue structure combines interest and fees distributed across numerous payments, creating a predictable cash flow.
  
  
• APRs typically range from 36%-150%, with state regulations often determining maximum allowable rates. 
  
  

State regulations create significant APR differences across markets, as shown in these figures for common installment loan products [source].

Fig. 1: APRs Allowed for a Six-Month $500 Installment Loan

Fig. 2: APRs Allowed for a Two-Year $2,000 Installment Loan

I’ve found these loans particularly appeal to borrowers who need substantial funds with manageable repayment flexibility. For example, one of our clients offers bi-weekly payment schedules for hourly workers and monthly options for salaried employees using our Term Configuration Tools. This simple alignment with customer income patterns has helped reduce their late payments.

Payday Loans

The payday loan model differs significantly:

• Loan amounts are smaller, typically under $500, and are designed for immediate cash needs.
  
  
• Terms are brief—usually 7-30 days, with 14 days being most common.
  
  
• Repayment happens in a single balloon payment that includes both principal and all fees.
  
  
• Instead of traditional interest, these loans charge fixed fees, typically $15-$30 per $100 borrowed.
  
  
• These fees translate to effective APRs of 400% or higher when annualized.

Payday lending operations require efficient systems for processing high transaction volumes with quick turnarounds. Our lending clients use our ACH Module and Quick Payment tools to process thousands of transactions daily while maintaining compliance documentation.

At-A-Glance Overview

Business Factor	Short-Term Installment Loans	Payday Loans
Typical Amounts	$500-$5,000	Under $500
Term Length	3-24 months	7-30 days
Payment Structure	Multiple installments	Single balloon payment
Pricing Model	Interest & fees	Fixed fee, $10$15-$30 per $1000
Effective APR	36%-150%	400%+
Customer Acquisition Cost Recovery	Spread across multiple payments	Must be recouped in a single transaction
Operational Complexity	Higher (multiple payment processing)	Lower (single payment processing)

Understanding your customer base significantly impacts profitability across both lending models. My work with various lenders has revealed distinct borrower profiles that directly affect acquisition strategies, default rates, and lifetime value calculations.

Short-Term Installment Borrowers

Short-term installment borrowers generally have the following characteristics:

• They typically earn between $35,000 and $50,000 annually, providing more income stability for regular payments.
  
  
• Their credit profiles usually fall in the subprime range (550-650 FICO), but without severe delinquencies.
  
  
• These customers generally seek loans for larger expenses like vehicle repairs, medical bills, or home maintenance.
  
  
• They value flexible repayment options that align with their income schedules.
  
  
• Installment borrowers are more likely to be homeowners or have stable housing situations.
  
  
• They maintain longer-term banking relationships, reducing payment processing complications.
  
  
• The demographic tends to skew slightly older, typically between 35 and 55 years of age.

These customers tend to have higher retention rates, with most returning for subsequent loans after successful repayment. This creates valuable lifetime customer value when properly tracked. You can keep track of your borrower list and increase your retention by implementing Bryt’s  Contact Management (CRM) System. You can use this database to further send out targeted communication at specific loan milestones for an enhanced communication loop with your borrowers.

Payday Borrowers

Payday loan customers typically have the following characteristics:

• They have lower household incomes, generally between $25,000 and $35,000 annually.
  
  
• Their credit profiles show severe impairment (below 550 FICO) or they have thin/limited credit histories.
  
  
• These borrowers predominantly seek funds for emergency expenses or immediate necessities.
  
  
• They prioritize immediate funding access, often requiring same-day cash availability.
  
  
• Payday customers frequently rent rather than own their homes.
  
  
• They often maintain newer or less established banking relationships.
  
  
• The demographic generally skews younger, typically between 25 and 40 years of age.

While conventional wisdom suggests these borrowers are one-time users, industry data indicates that most of the payday loan volume comes from repeat borrowers. This often means customers cycling through loans frequently rather than graduating to other products.

Effective borrower tracking systems help lenders segment and analyze customer characteristics over time, revealing which customers offer the highest lifetime value and critical information for maximizing profitability regardless of loan type. 

Payday lenders can use our User Notes feature in our CRM, which can help document customer preferences and payment patterns. Such features can help you tailor your collection approach, resulting in higher successful payment rates.

The revenue equations for these loan types differ significantly, impacting overall profitability.

Short-Term Installment Loans

Let’s analyze a typical short-term installment loan structure:

• $1,000 principal
  
  
• 12-month term
  
  
• 90% APR (including interest and fees)
  
  
• $138 monthly payment

This structure generates approximately $656 in interest and fees over the life of the loan. This is for a total revenue of $1,656 per $1,000 lent. The extended payment schedule provides a crucial advantage: even when defaults occur, you’ve often already recovered significant principal and profit through prior payments.I worked with an installment lender last year who was tracking their default recovery patterns manually. After implementing Bryt’s Interest Accrual Calculations, they discovered their effective yield on defaulted loans was actually 8% higher than their records showed because they could now accurately capture partial payments applied according to their waterfall rules.

Payday Loans

For comparison, let’s analyze a standard payday loan:

• $500 principal
  
  
• 14-day term
  
  
• $20 fee per $100 borrowed
  
  
• $600 due at maturity

This structure generates $100 in fees, representing a 20% return over just two weeks. If you look at the annualized yield, it is approximately 521%. You can use Bryt’s Lender Fee Module to ensure that your fee structure remains compliant across multiple states with varying regulations. With this module, you can set a precise fee that automatically adjusts based on the loan amount.

Profit Comparison

When comparing profit margins between these models, I advise lenders to account for these key factors:

• Recovery rates: Installment loans typically recover more principal and fees before default occurs, improving overall portfolio performance.
  
  
• Operational costs: Payday loans have lower per-loan servicing costs but require higher volume to achieve profitability targets.
  
  
• Funding costs: Installment loans tie up capital longer, while payday loans require more frequent capital recycling.
  
  
• Customer acquisition: These costs must be amortized across expected loan volume and repeat business for accurate profitability assessment.

One multi-state lender I work with uses Bryt’s Custom Reporting Module to track side-by-side performance metrics for both their installment and payday portfolios. This allows them to optimize their lending mix based on specific market conditions and regulatory environments.

But don’t just take my word for it—here’s what one industry leader has observed in his own business:

The day-to-day operational requirements for each loan type significantly impact profitability.

Short-Term Installment Loans

Installment loans require several operational processes that affect your staffing and technology needs:

• Your team will need to process multiple payment events per loan across the entire term, increasing transaction volume.
  
  
• You’ll need to maintain ongoing customer communication throughout the entire loan duration.
  
  
• Your systems must handle partial payments and modified payment plans when borrowers face temporary hardships.
  
  
• Flexible payment rescheduling options are often necessary to maintain customer relationships.

Collection workflows for installment loans require sophisticated tracking. One multi-state lender uses Bryt’s Notices Templates to create progressive contact strategies that maintain compliance with varying state requirements. Their automated reminder sequence helped reduce 30-day delinquencies while documenting all communication for regulatory oversight.

Payday Loans

Payday lending operations have different operational characteristics that shape your business model:

• Your payment processing typically involves a single collection event per loan, simplifying workflow.
  
  
• Your collection efforts concentrate on a single due date rather than spreading across months.
  
  
• You’ll need to manage higher transaction volume per dollar lent to achieve profitability targets.
  
  
• ACH processing becomes critical for most repayments to maintain efficiency at scale.

For payday operations, electronic funds transfer is particularly critical. Several of our payday lending clients rely on Bryt’s ACH Module for scheduled collections and detailed transaction history. It also has automated retry capabilities and error support options for failed payments, which can improve the collection rate while maintaining comprehensive documentation for audit purposes.

Key Efficiency Comparison

Operational Factor	Short-Term Installment	Payday Loans	How Bryt Helps
Payment Processing	Multiple events per loan	Single event per loan	Automated payment application and receipting
Collections	Staggered across the loan term	Concentrated around due dates	Automated communication workflows
Customer Communications	Ongoing throughout the loan	Focused on application and due date	Configurable notification templates
Reporting	Complex performance metrics	Straightforward cycle analysis	Custom reporting capabilities
Staffing Requirements	Higher per loan	Lower per loan	Automation reducing manual tasks

How defaults happen directly impacts how you should collect payments. Working with lenders using both models, I’ve seen clear patterns that can help you develop better strategies.

Short-Term Installment Loans

For installment loans, expect 15-25% of loans to default, with most problems starting 4-6 months into the loan term. Here’s what works best:

• Start contact early when payments are missed – don’t wait until they’re seriously behind.
  
  
• Since borrowers usually make several payments before stopping completely, offering modified payment plans often works well.
  
  
• The larger loan amounts and documentation make legal collections worthwhile as a last resort.
  
  
• Restructuring loans can save accounts that would otherwise be lost completely, keeping customers and recovering more money.

Payday Loans

With payday loans, first-time borrowers default at 15-20%, while repeat customers have lower rates (10-15%). Here’s what’s effective:

• Focus your collection efforts intensely around the single due date – you have a much smaller window to collect.
  
  
• Since defaults usually mean losing everything, automated ACH retries are critical for catching funds when they become available.
  
  
• Where allowed by law, offering rollovers or renewals helps maintain customer relationships when full payment isn’t possible.
  
  
• Legal collections rarely pay off due to small loan amounts, so focus more on preventing defaults than recovering after they happen.

One of our clients uses both loan types and sets up different late fee structures through our Lender Fee Module – percentage-based fees for installment loans and flat fees for payday loans. This simple change reduced their defaults by creating better incentives for on-time payment.For payday lenders specifically, our NSF feature helps manage the returned payments that often happen with single balloon payments. This tool lets you set up compliant retry rules that maximize collection opportunities while staying within banking regulations.

Factor	Short-Term Installment	Payday Loans
Revenue Per $1,000 Lent	$500-$700 over the loan term	$150-$300 per 14-30 days
Default Loss Impact	Moderate (partial recovery)	High (typically full loss)
Operational Costs	Higher per loan	Lower per loan
Customer Acquisition Cost	$150-$300 per borrower	$75-$150 per borrower
Customer Lifetime Value	Higher ($1,500-$3,000)	Lower but more frequent cycles
Regulatory Risk	Moderate	High
Capital Requirements	Higher (longer term)	Lower (faster turnover)
Scalability	Moderate	High

Volume and Business Model Considerations

Installment lenders can achieve profitability with lower transaction counts:

• Can become profitable with 300-500 loans monthly per location
  
  
• Allows more personalized service while maintaining profitability
  
  
• Higher average loan amounts ($500-$5,000) generate more revenue per transaction
  
  
• Extended loan terms create more substantial per-loan revenue

By contrast, payday lending profitability hinges on volume and efficiency:

• Process 1,000+ loans monthly per location to achieve sustainable profitability.
  
  
• Implement streamlined processes that handle high application volumes efficiently.
  
  
• Maintain minimal per-loan servicing costs to preserve margins.
  
  
• Requires lower capital per transaction but faster capital recycling.

You can track these volume metrics with Bryt’s Basic Loan Tracker Dashboard, which helps adjust marketing spend and approval criteria to maintain optimal portfolio performance.

Customer Value and Market Alignment

Short-term installment lending focuses on deeper customer relationships:

• Acquisition costs typically range from $150 to $300 per borrower
  
  
• Customers complete 2-3 loans over their relationship lifecycle
  
  
• Higher per-loan revenue offsets acquisition costs over time
  
  
• Often better aligned with rural markets where repeat business is crucial

Payday lending emphasizes transaction frequency:

• Acquisition costs typically fall between $75 and $150 per borrower
  
  
• Retained customers often complete 8-12 transactions over their relationship
  
  
• Quick cost recovery due to shorter transaction cycles (7-30 days)
  
  
• Often performs better in urban locations with higher foot traffic

Our Spreadsheet Reports Module helps you track acquisition cost recovery across different channels and analyze customer repeat patterns to optimize marketing spend.

Strategic Decision Factors

Your optimal model should align with these key business realities:

• Available Capital: Installment lending requires 3-24 months of capital deployment per customer versus 7-30 days for payday loans. Assess your funding capacity honestly.
  
  
• Regulatory Environment: Some states prohibit or severely restrict payday loans while permitting installment loans. Others impose rate caps that make certain models unviable. Review your target market’s regulatory landscape carefully.
  
  
• Market Demographics: Consider your location and customer base. Rural areas often support installment better, while urban locations can generate the volume needed for payday profitability.
  
  
• Competitive Landscape: Evaluate market saturation in your area. Entering a crowded payday market may require unsustainable acquisition costs, while an underserved installment market might offer better opportunities.
  
  
• Risk Tolerance: Be realistic about your organization’s risk profile:
  • Regulatory risk is typically higher for payday operations.
  • Default risk is more concentrated in payday loans but spread across time in installment loans.
  • Operational risk is higher for payday due to volume requirements.

Many of the most successful lenders I work with operate both models, using the same technology infrastructure to serve different customer segments and adapt to changing regulatory requirements. To provide further context on how these factors play out in real lending environments, consider this comprehensive analysis from an industry finance specialist:

The most successful lenders aren’t defined by which loan type they offer. Their success comes from how well they run their chosen model.

Many lenders now offer a mix of products. They let borrowers start with short-term loans and move up to installment loans after showing good payment history. This builds customer loyalty and improves overall performance.

Staying flexible with regulations gives you an advantage. The lending landscape changes often. Some states add new rules or limits on certain products. Lenders who can quickly adjust their offerings stay in business while others have to close.

The right technology makes all the difference. Your systems need to do three things well: keep you compliant with regulations, make your operations efficient, and provide a good customer experience to build retention.

Your success depends on creating systems that fit your specific market and growth plans. The lenders who succeed long-term constantly improve based on real results, not industry trends.

Want to see how Bryt Software can help you manage either loan type more efficiently? Schedule a personalized demo to explore our flexible pricing options that align with your chosen lending model.