Well, financial pitfalls are part and parcel of life. While some people turn to their friends to get themselves out of the tight financial spot, others opt for lenders. For a newbie, it could be tough to pick a particular type of loan because the lending industry is overwhelmed with a variety of financing options.
Since payday loans and personal loans are amongst the popular choices, you may be triggered to file a loan application for them. However, before throwing all your weight behind these loan products, you need to be well-versed about their differences. Otherwise, it can lead to making a wrong selection, which is destined to cause more harm than good.
The following differences between a payday loan and personal loan can bring more clarity to your mind:
- Loan amount
A fair proportion of the public has a habit of saving money for the rainy days. So they are usually well-equipped to tackle the minor monetary backdrops on their own. Broadly put, typically, people apply for a loan only when they need a large amount of money. This is one of the major factors which makes a personal loan more desirable than a payday loan.
A payday lender can offer you anything between 50 dollars to 1000 dollars. You may find a payday lender who could sanction you up to 5000 dollars, but there are quite a few of them. Provided the small amount of cash, payday loan serves as an ideal choice for jobless people who find it difficult to make ends meet.
In contrast, you can avail about 100000 dollars through a personal loan. Meaning, there is a great possibility that you can be left with a substantial sum even after dealing with the financial emergency. To top it off, you can spend the remaining amount anywhere. A personal lender can’t dictate you when it comes to using the borrowed money.
- Interest rate
The interest rate has a huge say to determine the total costs of a loan. Since a payday loan has a short repayment-period, lenders make it a point to accumulate as much as they can by charging an expensive rate.
Though the interest rates might vary depending on the state, they average nearly a whopping 30 to 40 percent. To make the matter worse, the lender has the authority to entitle you for a higher rate if you fail to make the payment on the due date. Considering these realities, it should not come to you as a surprise why many borrowers get stuck in the repayment cycle of a fast cash loan.
On the other hand, a personal loan can make you liable for an interest rate ranging from 4 to 36 percent. If you happen to maintain a solid credit history, the lender could offer you a rate as low as 6 percent.
- Eligibility criteria
Qualifying for a personal loan is tough. To begin with, the lenders can tap into your credit score. The lenders can even call for a hard inquiry, which might harm your creditworthiness. As a result, your future financing options can be squeezed a great deal.
Moreover, the lending party will also make sure that the borrower has a secure means of income. Depending on the institution you choose for the loan, your repayment history will also be entertained before the final approval.
Talking about payday loans, they have a far more flexible criterion. Arguably, no other type of loan can beat the ease of qualification that comes with a payday loan. You can get the required amount even with poor credit. At most, the loan provider will ask for a source of income. In exceptional cases, the lender might demand access to your bank account details.
More importantly, fast cash lenders don’t require any collateral. You can also get unsecured personal loans without keeping anything as collateral.
- Shopping around
A borrower must shop around to get cheaper rates. According to well-crunched figures, you can save about 3000 dollars after getting quotes from 5 lenders. However, the practice of comparing rates could be problematic if the public has to conduct it physically. It does not only consumes much time but also comes with significant physical fatigue.
Since personal lenders are scattered all over the place, it is challenging for borrowers to shop around conveniently. From credit unions to banks, and from NBFCs to online platforms, you will have to exploit every channel to ensure that you are getting the ideal rates.
If you are burdened with household or office responsibilities, you may not be able to drill down all these places. Whereas fast cash lenders are only available online. You can scratch up their rates efficiently without leaving your room.
- Approval timing
As soon as you submit your loan application, the lenders start evaluating your documents. Since the number of documents required by a personal lender is a lot, the approval can take nearly one week.
Quite the contrary, a payday lender can assess your loan application much more quickly. This is because of the minimum paperwork. With time, fast cash lenders have grown leaps and bounds. The competition is so fierce that many of them dispatch the amount within 24 hours.
Once a personal loan is received, you have to go through liquidating the amount that takes additional time. A payday loan is received in the form of cash. So if you need money in the nick of time, you know which loan type is suitable.
When we think about repayment, the loan term is generally the first thing that pops up in our mind. A personal loan’s repayment period can be as short as a couple of weeks. If the amount is comparatively larger and the borrower enjoys good terms with the lender, the duration can be stretched to one year. Turning to a personal loan, the borrowing party usually gets a longer repayment term – ranging from a few months to 10 years.
If your financial standing allows you to pay off the loan before the due time, you can do that in a payday loan. But you can’t take the same liberty in a personal loan. So much so, your lender reserves the right to penalize you for paying off the debt early.
The final verdict
Both these loan types have their strengths as well as shortcomings. Lenders have designed them keeping the specific needs of the general public in their minds. Having read this article, hopefully, you are now in a suitable position to determine which loan type can work the best for you.