Even though they might sound the same to a layperson, a payday loan and a personal loan is not the same thing. So, if you are in urgent need of funds and are looking for a loan, you must know, in detail, the benefits of both these loans and which ones suits your requirement better. In this article, we will discuss what payday loans and personal loans are, how they differ from each other, and the pros and cons of both.
Payday loans Vs. Personal loans
What is a Payday Loan?
If you are facing a temporary cash crunch and need to loan a small amount, which you will be able to pay back comfortably shortly, this is the type of loan you must go for. Payday loans are short term loans with a relatively higher interest rate that can help you meet your cash crunch until you get your next paycheck. Thus, they are a convenient way to borrow money for meeting small expenses like paying your house rent, car repair, etc. until your next payday; but, they do come at a high cost. Although the rates and charges are higher, you get the loan amount quickly with minimal documentation.
To apply for a payday loan, you need to mention details like your job status, sources of income, monthly earnings, etc. in the application. If you qualify, the loan amount is disbursed to you, and you are typically given a few weeks (2-4 weeks) to pay back the loan, once your next paycheck arrives. You might also be required to submit a postdated check covering the loan amount and finance charges. The borrower can pay back the loan on or before the due date, or also roll over the loan for an additional pay period. However, to roll it over, the borrower is charged an additional fee.
So, while payday loans have become popular because they do not affect the credit history and can be availed for a small loan amount, it is essential to remember that you need to pay them off immediately when your next paycheck arrives. You must never borrow an amount that you know you won’t be able to pay off within the next few weeks. If you fail to pay back the loan on time, lenders usually give some additional time with added charges, post which, there is a real chance of you being considered a defaulter and being stuck in a cycle of debt. However, if the amount is small and can be quickly paid off from your next salary, several lenders and institutions provide check-cashing service and short-term lending services.
What is a Personal Loan?
If you need a large sum of money to buy make an expensive purchase, go on a holiday, or plan your wedding, this is the type of loan you must avail. A personal loan gives you the chance to borrow a large sum of money to meet your needs, has a lower rate of interest, and can be repaid over a period of several months or years. However, unlike payday loans, banks and lenders usually check your credit history before approving your loan request. This means that if you have taken a loan in the past and paid it on time, your application has a higher chance of being approved and you can also avail a higher loan amount. On the other hand, first-time borrowers are also welcome to apply for personal loans.
Another benefit of a personal loan is that it is unsecured, i.e., it is not backed by any collateral like your home or other personal assets. To apply for a personal loan, all you need to fill an application form and submit a few documents like proof of identity, proof of address, and proof of income, etc. After checking your details, the lender offers you a credit line, i.e., the maximum money you can borrow given your current financial arrangement. For instance, PaySense offers personal loans from 5,000 INR to 2, 00, 000 INR to salaried individuals (minimum salary 12,000 INR per month) and self-employed individuals (minimum earnings 15,000 per month).
If approved, you get the loan credited to your bank account, and you can pay back a fixed sum every month (EMI) over a set time period that you choose yourself. Since the interest rates are fixed, your EMIs also remain unchanged, thus, allowing you to plan your monthly expenses better. Personal loans are a great way to avail instant cash when you need the money and are also not heavy on your pocket since you have the option to pay back a fixed sum monthly stretched over a long period.
Key differences between Payday loans and Personal loans
- Payday loans are perfect for small amounts that are required to be paid within a month, while personal loans involve a substantial amount that can be paid over a few months or years.
- Payday loans do not require you to have an excellent credit history, while the eligibility and interest rate of a personal loan depends on your credit history with the lender.
- Payday loans require you to guarantee your next paycheck, while personal loans require the borrower to have a steady source of income and a strong credit history.
- Payday loans are usually offered by lenders that deal with check-cashing service and short-term lending, while personal loans are offered by banks, credit unions, and online lenders like PaySense.
- Payday loans can be rather expensive since the rate of interest is quite high and if you fail to pay on time or request a rollover, you are charged extra financial fees, while personal loans are cheaper but require you to have exercise financial discipline.
Payday Loans or Personal Loans – Which one should you go for?
Payday loans and personal loans are both tailor-made to help you in different situations of your life. They are short-term loans that can be availed if you need a small amount to meet an urgent requirement like a mortgage, a car repair, etc. in the middle of the month. This type of loan does not require you to have an excellent credit history and can be approved in no time if you have a steady source of income and can pay back the loan within a month, i.e., the day of your next paycheck. Thus, think of smaller day-to-day unforeseen expenses that can be paid off quickly.
A personal loan, on the other hand, can be availed if you need a large sum of money for any purpose like buying a car or jewelry, going on a trip, purchasing electronic equipment, planning for your wedding, etc. To get a personal loan at a low-interest rate, you have to provide proof of your employment and income and agree to pay it back over an extended period. You are required to pay a fixed sum of money every month for the time you choose. Thus, for covering more considerable expenses regarding life events, milestones, festivals, celebrations, and emergencies, you should consider a personal loan.
You can choose between the two based on the amount you need, how quickly you need it, the interest rate you are willing to pay, and the period you need to repay it.
Taking a loan is a big decision and will directly affect your financial health. So, you need to be well-informed about the type of loan you avail, its benefits, and its repercussions too.
To know more about how you can apply for a personal loan from PaySense, use our EMI calculator or get in touch with us.
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