Payday Loans vs Personal Loans – Similarities and Differences
One can address tricky financial situations in several ways, like redeeming investments or using savings. Using your savings or redeeming investments aren’t the wisest options; you can opt for taking out personal or payday loans from various lenders.
Many borrowers prefer taking out payday and personal loans as they can use them to meet any financial needs. This article goes over the similarities and differences between personal and payday loans to help you decide which option is the best for you.
What Are Payday Loans?
Payday loans are a form of short-term borrowing—usually 30 days—where lenders extend high-interest unsecured loans to borrowers. Applying for a payday loan is easy as it’s usually online, and the money is disbursed once approved.
You don’t have to worry about how to find a suitable payday lender; various broker platforms connect borrowers with lenders willing to issue these loans once you’ve shown proof of income. These loans are usually ideal for financial emergencies like car repairs.
What Are Personal Loans?
Personal loans are long-term or short-term advances to finance vacations, renovations, or weddings. Borrowers have the freedom to spend the loan in whichever way they please.
Financial institutions approve these loans based on borrowers’ capacity to repay the loan and their credit profile. The interest rates on these loans differ depending on the financial institution.
Payday Loans vs Personal Loans: Similarities
Their Use
Payday and personal loans are usually very accessible, and many people borrow them during emergencies or to meet unexpected bills. Nevertheless, you can use them to cover any other financial need.
Their Nature
These loans must be repaid to lenders and usually, come with interest that must be paid for the loan duration.
Payday Loans vs Personal Loans: Differences
Loan Amount
Payday lenders usually offer loan amounts between $100 and $5000, while you can get personal loans of up to $80000 or more depending on your income and credit profile.
Lending Institution
Non-bank lenders usually offer payday loans; several broker platforms like Pronto Payday connect borrowers to various payday lenders, while personal loans are usually issued by banks, credit unions, online lenders, or credit unions.
Eligibility
Payday loans are easily accessible if you provide proof of income, banking details, and identification. Borrowers with poor credit scores are eligible for payday loans.
In contrast, the lender must check your credit report, credit score, proof of income, and identification to be eligible for a personal loan. You must have a good credit score to qualify for a personal loan.
Approval Time
Payday loans have a fast approval and assessment process; you can receive the loan amount on the same day as long as you meet the eligibility requirements. It usually takes one to seven days for personal loans to be approved.
Interest Rate
The interest rates for payday loans range between 30% and 40$, while for personal loans, the APRS of payday loans can be as high as 400%. Personal loans have lower interest rates, between 10% and 35%. If you have strong credit, you might be charged single-digit interest rates.
Tenure
Payday loans have short repayment terms that last between several days or a year, depending on the amount borrowed. On the other hand, personal loans have extended repayment terms ranging from 3 months to ten years.
Security
You don’t have to provide any collateral to get a payday loan; all you have to do is provide proof of income. Personal loans can either be unsecured or secured; only people with excellent credit scores can qualify for unsecured loans. For secured loans, you have to provide a guarantee, which can be a car, a house, or any other valuable item.
Credit Checks
Payday loans don’t check a borrower’s credit history; their income determines the amount they can borrow.
For personal loans, lenders must check a borrower’s credit profile to check if they have existing debts and how they repay them. The Credit report is what determines the amount one can borrow.
Impact on Credit Score
Payday lenders don’t provide credit bureaus with reports; a borrower’s payday loan history isn’t usually recorded on their credit history.
In Contrast, when you take out a personal loan, it reflects on your credit report. Furthermore, your repayment behavior affects your credit score; the score increases when you make timely repayments and vice versa.
Conclusion
Payday and personal loans are easily accessible loans that can come in handy during financial emergencies. Although they may be confusing, they have significant differences. Understanding the differences between these loans is essential to determine which one best suits your needs.
This article has been published in accordance with Socialnomics’ disclosure policy.
