When a financial emergency strikes or a large expense arises, it can significantly impact your finances. It’s understandable to consider tapping into your hard-earned savings, but this may not be the best course of action. Instead, seeking a loan from a reputable lender can provide the necessary funds to meet your immediate needs. However, it’s crucial to make an informed decision when it comes to loans.
For personal use, two common loan options available in the market are online personal loan and payday loan. Although they may sound alike, they differ significantly. Let’s take a closer look at the differences between personal loans and payday loans.
What is a Payday Loan?
If you’re in a financial bind and need cash fast, you may have considered taking out a payday loan. But what exactly is a payday loan? Simply put, it’s a short-term loan that’s designed to help you cover unexpected expenses until your next paycheck arrives.
Compared to a personal loan, a payday loan offers a significantly lower loan amount. However, the application process is typically straightforward and fast, with minimal documentation required. Usually, only proof of employment and a checking account is necessary.
It’s important to remember that payday loans come with high-interest rates and fees. This means that if you don’t pay back the loan on time, the interest can quickly add up and become unmanageable. It’s essential to only take out a payday loan if you’re confident that you’ll be able to repay it in full when your next paycheck arrives.
What is a Personal Loan?
Personal loans are a type of loan that can be used for a variety of purposes, such as debt consolidation, home renovations, or unexpected expenses. Unlike other types of loans, online personal loans are unsecured, meaning they do not require collateral such as a car or house. Instead, lenders use other factors such as credit score and income to determine whether or not someone is eligible for a personal loan.
Personal loans typically have fixed interest rates and monthly payments over a set period of time. The terms and conditions vary depending on the lender and borrower’s financial situation. Generally speaking, the better your credit score and income level, the lower your interest rate will be. Personal loans can range from a few thousand rupees up to lakhs of rupees depending on the lender’s policies.
If you’re considering taking out a personal loan, it’s important to do your research beforehand and shop around for the best deal.
Key Differences Between Personal Loans & Payday Loans
- Interest Rates
Personal loans and payday loans differ significantly when it comes to interest rates. Personal loans typically offer lower interest rates than payday loans, making them a more affordable option in the long run. On the other hand, payday loans are known for their high-interest rates, which can be as high as 400% APR or more. These high rates can quickly lead to a cycle of debt, making it challenging to repay the loan and resulting in further financial problems. It’s crucial to consider the interest rates of both loan options before deciding which one to choose.
- Repayment Term
One of the primary differences between personal loans and payday loans is their repayment terms. Personal loans typically offer longer repayment periods, ranging from a few months to several years, allowing borrowers to make monthly payments over an extended period. This flexibility can be particularly beneficial for larger loan amounts. In contrast, payday loans are designed for short-term borrowing and are usually due to be repaid within a few weeks or the next payday.
- Credit Check
When it comes to payday loans, lenders typically don’t conduct credit checks. Instead, having permanent employment is often enough to secure the loan, with the loan amount being based on the borrower’s salary.
In contrast, personal loans may require a hard credit check before approval. The loan amount is usually determined by the borrower’s affordability and credit score. This means that if you have a good credit score and a stable income, you may be eligible for a higher loan amount with better interest rates.
- Loan Amount
Payday loans are typically intended for smaller purchases, such as covering unexpected expenses or repairing a car. Lenders who offer payday loans are generally less willing to take on a high level of risk associated with borrowers who have bad credit histories.
In contrast, personal loans can offer much larger loan amounts, depending on the borrower’s creditworthiness and financial situation. With a good credit score, borrowers may be able to access enough cash to finance significant purchases or fund an entire wedding. If you require a considerable amount of money, a personal loan may be the right option for you.
- Approval Time
Payday loans are designed to provide quick access to funds in emergency situations, with borrowers typically receiving the money within a few hours up to 24 hours after approval. This makes them a suitable option for those who need cash quickly.
In contrast, personal loan lenders may not be as fast to disburse funds. While some lenders may provide access to cash within a few days, others may take longer. It’s important to research the lender’s process and turnaround time to ensure that the loan meets your needs.
- Secured or Unsecured
Payday loans are typically unsecured loans that do not require borrowers to provide any collateral to secure the loan. Instead, the lender will assess the borrower’s income and paycheck to determine their ability to repay the loan.
Personal loans, on the other hand, can be secured or unsecured. If a borrower has a low credit score, they may be required to provide collateral to secure the loan. However, if the borrower has a good credit score, they may be eligible for an unsecured personal loan.
Payday Loans or Personal Loans – Which One Should You Go For?
When deciding between a payday loan and a personal loan, it ultimately depends on your financial situation and needs. If you have a low credit score or need a small amount of money for a short period, a payday loan may be a good option. However, if you have a better credit score and need a larger sum of money with a longer repayment period, a personal loan may be a better fit. It’s essential to carefully consider the terms and requirements of each loan and evaluate your ability to repay the loan before making a decision. And personal loans can help you improve credit score if you make on-time payments over time.