Payday loans and personal loans can both be a good option if you need to borrow money fast. The registration and disbursement of funds processes are usually rather quick for both, but there are some major differences between the two.
The question is, what is the best approach for you to obtain quick cash? Read our in-depth comparison between payday loans and personal loans so that you can choose the better-suited loan for yourself after reading this article!
How do Payday Loans Work?
Payday loans are a costly form of borrowing money, but they provide a quick method to receive a small amount of money without running a credit check.
They operate as follows: Payday lenders often charge between $10 and $30 every $100 borrowed for issuing a short loan that must be returned with the borrower’s next paycheck.
The borrower grants permission for the lender to take the loan amount, plus fees, out of their bank account on their next paycheck by either writing a postdated check or approving the withdrawal.
The money due from your bank account by the due date is automatically deducted by payday lenders. The payday lender still retains the right to prosecute collection of the amount owing if the check fails or if there are insufficient funds in your account.
Pros and Cons of Payday Loans
|Payday loans don’t normally demand a credit check because they are backed by the borrower’s next salary. As a result, they represent an appealing alternative for consumers with poor or no credit history.||Interest rates for payday loans are very high. Each $100 that is borrowed every two weeks is subject to borrowing costs that normally range from $10 to $30. You might wind up paying as much as 400% APR. (Source: InCharge)|
|Fast cash is provided via payday loans. You might be able to get the money you require right away if you apply for a payday loan.||The periods of payday loans are quite brief. Payday loans must be returned by the borrower’s following payday, which is normally two weeks away.|
|Payday loans may be used to pay for almost any expense.||Payday loan debt cycles are something that consumers may fall into.|
You can use payday loans when you need a small amount of cash for a short time period. They are available for those with bad credit, too.
How do Personal Loans Work?
When a customer takes a personal loan, the lender provides a lump sum of cash. The loan is returned with interest over a certain length of time, usually a few years, in fixed installments.
Personal loans are usually unsecured, so you are not required to provide collateral. Because of this, lenders mostly use your credit score and the ratio of your debts to your income to decide if you are eligible and what your APR will be.
Pros and Cons of Personal Loans
|Fixed interest rates mean fixed monthly payments that are predictable.||Personal loan APRs may be quite high, especially for consumers with poor credit. The cost of the loan increases as the APR increases.|
|Personal loans do not need any collateral. By taking out an unprotected personal loan, you avoid the possibility of losing a valuable possession like your home or automobile.||If you can’t pay back your personal loan, it could hurt your credit score.|
|Numerous purposes can be served by personal loans. A personal loan may be used to finance almost anything.||When you take out the loan, you can pay an origination fee that ranges from 1 to 8 percent, or you might be penalized for paying it off early.|
You can use personal loans when you have a good or fair credit score and need to borrow a larger sum for a longer time period.
Payday Loans vs. Personal Loans
|Payday Loans||Personal Loans|
|Basic Function||Payday loans are small loans that you may receive and repay in 14 days. You may be able to borrow for slightly longer, such as a few months. These loans are designed for short-term emergencies.||Personal loans are for larger amounts and longer periods of time, usually from 6 months up to 5 years or more. These loans can be used for multiple purposes, mostly for mid and long-term needs.|
|Interest rates||Payday loans have high APRs that can range from 30% to 600% or even more. Payday loan APRs are capped in some states, and unregulated in others.||Personal loans have lower interest rates that range from 5% to 35%. People with good and excellent credit ratings can access the lowest APRs.|
|Repayment terms||When you take out a payday loan, the lender anticipates that you will pay it back with your upcoming salary, which will typically be within 24 days. For slightly longer “payday” loans (2-6 months), your repayments will be taken automatically from your account on the same day.||Personal loans let you pay back the loan in weekly or monthly installments until it is paid off in full by the end of the loan term. These repayments are usually fixed amounts, taken on the same days from your bank account automatically.|
|Credit checks||No credit checks are performed by most of the payday loan lenders, however, this is not a guarantee. A stable monthly income will qualify you for the loan in most cases.||Personal loan lenders need to perform a thorough credit check on you before approving your loan request.|
|Loan Amount||You can only acquire a small amount with a payday loan, from $50 up to $1,500 in most cases.||Personal loans allow you to borrow a larger sum of money, usually up to $35,000, but sometimes even up to $100,000.|
|Approval time||Payday loans are appropriate for urgent demands since you may have the money in your account in as little as a few hours.||Personal loan providers often take a few days to deposit the funds in your account.|
|Collateral/Security||Payday loans are unsecured. Prior to receiving a loan, the lender won’t need you to offer any collateral.||Personal loans are mostly unsecured as well. Unsecured personal loans are available to those with fair and good credit ratings.|
Which type of loan is right for me?
When it comes to borrowing money, personal loans usually cost less than payday loans, and payday loans also carry a higher risk. However, their approval process takes longer and is more strict – if you have bad credit, you may not be eligible.
If you have a decent credit rating, and you are in need to borrow a larger sum of money over a longer period of time, you should apply for a personal loan. This choice will let you borrow more money, give you more time to pay it back, and have a lower interest rate.
If you have poor or no credit, you need a smaller amount of money fast, that you could pay back in a month or a few months, a payday loan could be the right option for you. This will choice will let you receive the money you need fast, and pay it back with your next paycheck.