Payday loans and personal loans are two different types of loans that serve distinct purposes and come with various terms and conditions. The following outlines the fundamental distinctions between payday loans and personal loans.
Loan Amount and Term
- Payday Loan: These are typically small, short-term loans meant to cover a borrower’s expenses until their next payday. The loan amounts are usually relatively low.
- Personal Loan: Personal loans can be for larger amounts and have longer terms. They are often used for various purposes, such as debt consolidation, home improvement, or major purchases.
- Payday Loan: Payday loans often have very high interest rates, making them an expensive form of borrowing. The annual percentage rates (APRs) can be very high.
- Personal Loan: Personal loans may have lower interest rates compared to payday loans, especially if the borrower has a good credit score. The interest rates on personal loans can vary based on the creditworthiness of the lender and the borrower.
- Payday Loan: Payday lenders typically do not perform a detailed credit check. Instead, they may focus more on the borrower’s income and ability to repay the loan.
- Personal Loan: Personal loans usually involve a credit check, and borrowers with higher credit scores are more likely to qualify for lower interest rates. A good credit history is often an important factor in obtaining a personal loan.
- Payday Loan: Payday loans are unsecured, meaning they do not require collateral. Approval is based primarily on the borrower’s income and ability to repay.
- Personal Loan: Personal loans can be either secured or unsecured. Secured personal loans are those that require collateral (Such as a car or savings account), while unsecured personal loans are those that do not need any collateral.
- Payday Loan: Payday loans are typically repaid in a lump sum on the borrower’s next payday. Some lenders may allow for an extension, but this often comes with additional fees and higher interest.
- Personal Loan: Personal loans usually have fixed monthly payments over the loan term, making it easier for borrowers to budget and plan for repayment.
- Payday Loan: Payday loans are subject to specific regulations that vary by jurisdiction. Due to concerns about predatory lending, some jurisdictions have imposed restrictions on payday loan terms and interest rates.
- Personal Loan: Personal loans are generally subject to consumer lending regulations, which vary by country and region. They are often considered a more traditional and regulated form of borrowing.
How Do Payday Loans Work?
Payday loans offer a quick way to get a small amount of cash without a credit check, but its costly to borrow them. A payday lender gives a small loan amount that should be repaid using the borrower’s next paycheck for a specific fee. The borrower either writes a post-dated cheque or grants permission to the lender to withdraw the loan amount including the fees from their bank account. Some borrowers may be able to pay the full amount back within a few weeks. Numerous borrowers find themselves compelled to extend their payday loans, resulting in the initiation of a new loan accompanied by additional finance fees, thereby escalating the overall borrowing costs..
What are the Benefits of Payday Loans?
- Payday loans most often don’t need a credit check: Payday loans are guaranteed by the borrower’s next salary, so they don’usually require a credit check. This makes them an attractive choice for borrowers with bad credit or no credit.
- Payday loans offer fast funding. A payday loan gives you access to quick cash that you need as soon as you apply.
- Payday loans can be used to pay for virtually anything: If you need money instantly to pay bills, then payday loans may seem like a convenient way to make ends meet.
How do Personal Loans Work?
Personal loans are installment loans. They can be secured or unsecured, but they always have lengthier tenures and lower interest rates compared to payday loans. Unlike a payday loan, lenders evaluate your credit profile and score to determine whether you will be able to repay the loan back. These loans are paid back in EMIs or monthly installments. The EMIs are fixed and are calculated based on the interest rate, personal loan amount, and the tenure.
Benefits of Personal Loans
- Flexible Use of Funds
- Debt consolidation
- Predictable Payments
- Quick approval and disbursal
- Improvement of credit score
- No collateral required
- Fixed loan terms
- Competitive interest rates
- Emergency expenses
Personal Loans and payday loans are curated to fulfill varied requirements. The loan amounts, interest rates, repayment terms, etc., are different. While both have advantages and disadvantages, you must choose the one that best suits your funding requirements and repayment capability. Understanding the differences between payday loans and personal loan will help you make your borrowing decision with more conviction. So, read and understand the differences and take an apt decision.