If you’re on the hunt for some quick cash to cover an unexpected expense, chances are you’ve come across a mountain of lenders offering either payday loans or personal loans.
With so many options, it can be difficult to discern between these two types of loans, especially if you’re new to the personal finance market. However, knowing the key differences between the two can really help you decide which works best for your individual financial needs.
A payday loan allows you to borrow a small amount, typically up to $2,000, which can be repaid via a short-term repayment schedule between 16 days and one year. Payday loans, or cash advance loans, are unsecured which means they have no collateral or assets backing them.
Qualifying for a payday loan is quite simple, with the minimum requirements usually being 18 years or older, having a valid form of ID, an open bank account, and proof of employment. Therefore, these types of loans are usually designed for borrowers with poor credit and limited access to traditional lenders like banks.
Payday lenders are unable to charge interest on payday loans due to government regulation, however, they can charge fees including:
Compared to a payday loan, personal loans are typically a larger amount that is repaid over a longer period of time. Personal loans can be taken out from a bank, credit union, or an online lender. They are often used to purchase assets like vehicles or furniture, pay for medical expenses, or home improvements as well as cover car repairs or to consolidate debts.
Some lenders offer ‘bad credit personal loans’ so if you’re a borrower with a poor credit history, don’t let this deter you from applying for a personal loan.
Personal loans can be secured to an asset you own, like a vehicle or your house, or it can remain unsecured. Personal loans that do have security or collateral behind them typically come with lower interest rates than unsecured loans.
Another factor to consider is that interest rates can be either fixed or variable, which is something to compare when applying for a personal loan.
A fixed rate is a rate locked in at the start of your loan term and kept in place throughout the duration of your loan contract. This type of interest rate is offered by most lenders and enables you to accurately budget as you’ll know exactly how much you’re paying each month.
Variable interest rates tend to fluctuate so while you can save when rates fall, you may be offered a higher base rate.
So a payday loan vs a personal loan, what’s the difference?
There are some key factors that differentiate payday loans and personal loans from each other, so it’s important to consider these before taking out a loan:
Before you decide to borrow money from a payday or personal loan lender, you should consider your current financial situation. Ask yourself the following questions before taking out a loan:
Once you’ve considered these questions, you can be well on your way to finding the right personal finance option to suit your financial needs.