Personal Loans vs Payday Loans: Know the Differences

Taking out a loan can be a good approach to cover expenses you wouldn’t be able to cover otherwise. Today’s borrowers have a wide range of loan options to select from to meet their financial demands. Payday and personal loans, on the other hand, are more common.

What are personal loans?

Personal loans are typically long-term loans used to fund personal or family goals such as weddings or house improvements or to consolidate many debts at the same time. You have sole authority over how the loan funds are used. These loans are granted based on the borrower’s credit history and ability to repay the loan with his own funds. Personal loans are typically repaid over a certain period of time in fixed monthly installments.

What are payday loans?

A payday loan is a high-interest, unsecured loan that comes in handy in times of need. The loan is disbursed as soon as it is approved, and borrowers return the loan when they receive their next paycheck or other sources of income. Working professionals stand to benefit the most from payday loans, as they are specifically created for them.

Personal Loans vs Payday Loans

Loan amount

Payday loans are usually for small amounts, ranging from Rs. 5000 to Rs. 1-2 lakhs. Personal loans are available in amounts ranging from Rs. 50,000 to Rs. 50 lakhs.

Lenders

Banks, credit unions, NBFCs, and online direct lenders all offer personal loans. Only online lenders who specialize in specific items offer payday loans.

Cost

Payday loans have substantially higher interest rates than personal loans, and they may come with additional fees and charges.

Security

Unless you placed an asset as collateral, personal loans are often unsecured. Personal loans may require a creditworthy co-signer for persons with bad credit. Payday loans are secured by a post-dated check or permitting the lender to withdraw the amount owed to you. Payday lenders may, in severe situations, claim your wages to collect the money you owe. To do so, they must obtain a court order. 

Accessibility

Payday loans might be simpler to obtain, particularly for those with a poor credit history or other financial difficulties. You can even acquire a loan without a bank account if you have a prepaid card account with some payday lenders.

Eligibility

Personal loans have stringent eligibility requirements, with the lender checking your credit score, consistent income, and repayment history. You can check the personal loan eligibility criteria of various lenders online. Payday loans are far more flexible, and persons with bad credit can be considered. Anyone with proof of identification, a bank account, and proof of income can get a payday loan.

Approval time

Personal loans are less expensive, but the approval process takes time. Payday loans are more convenient because the application and approval processes are both quick. The tradeoff, on the other hand, is the additional fees you must pay on payday loans.

How to decide between a personal loan and a payday loan

While you now have a better understanding of the fundamental differences between the two, you should do some preliminary research before limiting your loan alternatives. The three important considerations to consider before choosing between the two are as follows:

The requirement

You must first comprehend and analyze your financial requirements. Aside from the amount you require, you must also consider how quickly you require it.

Credit history

If you have a strong credit history, you can prioritize personal loans that are less expensive. Even if you have a strong credit history, you may need to use payday loans online if you are in desperate need of cash.

The cost

It will come down to the monthly payment and the total repayment amount in the end. To ensure that the entire terms and repayment amount are within your budget, use the online calculator tools supplied by lenders.

Personal loans and payday loans are both advantageous. Both products have advantages and disadvantages, but they are suitable for borrowers with unique needs. To choose the ideal solution for you, you need first analyze your requirements and then conduct considerable research.