Personal Loan vs. Payday Loan: Understanding the Difference

From time to time financial problems happen to almost all of us, suddenly unexpected expenses come up that we don‘t have the cash on hand to pay for. And loans are coming to help us get out of this difficult situation. Let’s see what payday loan and personal loan are․

These two loan options may seem they offer the same thing, but do not be tricked - payday loans and personal loans are rather different. They are a great option for a quick money need but you need to know all the details to decide which option suits you the most.

Generally speaking, there are three main differences are:

• The amount you can borrow;
• The interest rates;
• The period for repayment.

For instance, payday loans may offer smaller amounts, relatively higher interest rates, and shorter repayment periods than personal loans․

How Do Payday Loans Work?

A payday loan also called a payday advance, second chance payday loan, short-term, or cash advance is a small, short-term loan, that comes due when you are next paid. Most payday loans have a small borrowing amount, about $500 or less, and have higher fees. These types of loans were created to help people cover emergency expenses or other debts that might come up between payments when there was no money left from the previous payday․

So if you need some cash today, you can think of a payday loan. Of course, this option may seem great to you, but it also has its pros and cons, so before you request funds you need to be thoroughly familiar with the loan terms to avoid further problems.

What are the payday loan pros?

• All credit types are welcome. You may be eligible for payday loans even if you don’t have the best credit score, people with a bad credit history are also welcome to apply.

• Easy online application form. Payday loan online application form is easy to fill, it is simple and does not require great computer skills.

• Instant decision. You do not have to wait a few days for a loan to be approved. If you have the necessary qualification, getting a loan is easy and fast. Most lenders aim to transfer you the loan within 24-48 hours of application approval.

• Extremely convenient. You do not need to visit a financial institution, everything is online. There is no paperwork, no guarantee, and no inconvenience.

That brings us to the cons of payday loans:

• They’re expensive. As compared to other personal loans that charge 4%-36% interest, payday loans charge about 12-30%.

• It’s easy to get into debt. Payday loans are defined as having unfair, misleading, or unaffordable terms that make you get into debt.

• Payday loans can’t help you to create a credit history. This kind of loan generally reports the debt to the credit bureaus, so they can’t help you build credit, they even could hurt your credit if you do not pay properly.

How Does a Personal Loan Work? Pros & Cons

Personal loans are a type of installment loan. This funding option lets you borrow a small amount of money and pay it back once a month. The amount for a personal loan may vary from one lender to another, but normally it ranges from $1,500 to $100,000. How much you may qualify for will depend on your credit score the higher are your scores the higher will be the amount you can borrow.

Before you will choose a personal loan there are some factors to consider when making your decision.

Key benefits of personal loans:

• They are flexible, it means personal loans unlike other types of loans that can only be used for a certain purpose, can be used for many purposes, from consolidating debt to paying off home expenses;
• They have relatively lower interest rates and higher borrowing limits;
• They are much easier to manage.

Key drawbacks of personal loans:

How to Choose the Best Option?

The primary distinction between a payday loan and a personal loan is in the terminology. A payday loan is a very short-term loan that is normally due within a month, while a period for a personal loan is a minimum of 2 years.

Payday loans are much more accessible than personal loans. You can get a payday loan in 30 minutes if you are qualified. Processing time on a personal loan will range from a few days to a few weeks.

Another essential difference between payday and personal loans is that the lending report only contains personal loan information. If you apply for a personal loan and get it after making on-time payments, your credit score will rise. This will help you to raise your credit scores and apply for bigger loans in the future.

A key similarity between payday and personal loans is that both are often unsecured, so there’s no property or asset behind the loan. In other words, if you default on a payday loan or personal loan, there’s nothing the lender can seize.

If you are faced with a choice between personal and payday loans, personal loans will be the more affordable alternative.