If you need credit, you won’t be short on choices. There are so many forms of credit out there. But to find the best fit, you really need to know your options. This is especially true in a financial emergency.
That is where payday loans and personal loans come in. Both can help you in a time of crisis. If you’ve been wondering what the main differences are, this article is for you. Read on to find out what separates these two loan types.
Personal loans explained
A loan is a broad term. It also accounts for car and home loans. However, personal loans are the type that is comparable to payday loans. Personal loans can be any amount where you borrow a specific amount of money that you qualify for.
That amount is then paid back in small increments. The small increments are referred to as instalments. The instalments include interest and any loan fees. You can make the repayments weekly, bi-monthly, and monthly, it just depends on your loan provider.
Personal loans usually have affordable interest rates. They can be flexible, with repayments varying between several months or several years. Also, the timespan usually depends on the amount you borrowed.
To qualify for one of these, the loan provider will run a credit history and income check. In addition, what makes this type of loan attractive is its convenience. You can usually apply for personal loans online and they may even be approved within the day!
Payday loans explained
Payday loans are smaller loans. The amount you can borrow is far more restricted. For one, it can only be a portion of your salary, and after borrowing the amount, you will need to repay the entire loan by your next paycheck. So it’s no surprise why these loans are called ‘payday’ loans.
The loans typically need to be repaid in two to four weeks. Sometimes the loan provider will offer a rollover option. This means that if you are unable to repay the loan by the due date, you can have more time. However, you will owe more interest on the loan.
The interest rates associated with payday loans are extremely high in comparison to others. Payday loan providers may also not need to check your credit score or history. This option can often result in a cycle of debt that only incurs interest and fees.
Personal Loans Vs. Payday Loans
The loans share some superficial similarities. Personal loans and payday loans are both options for emergencies. If you are in need of cash quickly, these options may both look tempting.
Some larger personal loans may be secured. This means that there is some collateral that the provider can claim if you cannot repay the loan. Secured instalment loans will have lower interest rates than their counterpart. Payday loans can only be unsecured loans.
Monthly instalment personal loans can get you a lot more money. You may even qualify for loans up to $10,000. A payday loan can only be a portion of your salary. Usually, borrowers can only get a few hundred dollars.
Personal loans are paid off over many months, where interest and fees are incorporated into the monthly repayments. However, you are still able to pay off personal loans sooner if you want to. And some lenders don't penalise you for this.
Payday loans must be paid off when you get paid. This amount will include fees and the interest on the loan amount (paid in a lump sum).
Personal loans will require more documentation and, as said before - a credit score/history check. You can get approved quicker if you have all the right documentation. Payday loans require less documentation and so can have a faster turnaround time.
Which is better for you?
Before deciding on a payday loan or a personal loan, make sure you do your research. While payday loans may be more convenient, a personal instalment loan might be a safer financial option. However, if you have a poor credit rating, you may struggle to qualify for any type of credit.
If you’re in this position and are considering a payday loan; think about the following:
- Will you be able to pay off the entire loan amount and additional fees/interest with your next paycheck?
- Can you still survive on the remaining amount of money?
- Is the reason you need the money an absolute emergency(medical, residential, etc.)?
If you answered yes to all of the above, then the payday loan may be a good option for you.
If you have a healthy credit score and you need a bigger loan amount with a longer repayment period, you may want to opt for a personal instalment loan instead.