If you ever enquired about a loan and tried to compare different options to see which one is right for you, you know that it may be confusing.
If you compare payday loans and personal loans you will find many similarities. The eligibility terms, loan amount, repayment terms – they may all sound quite similar. This is especially true if you are not looking for an extremely short-term loan or a very high amount that may be available using one type of a loan but not if you apply for the other type.
Different lenders may apply different criteria when lending money which makes comparing loans even more difficult. They all have to comply though and can only offer loans to people who will be able to repay them. For example, lenders must review 90 days of the borrowers’ bank statements before they approve the loan.
In short, payday loans mean a smaller amount that you can borrow, a higher interest rate and shorter repayment time. If you use personal loans the amount that you may borrow is higher, the rates lower, and the repayment time longer.
To understand the differences between payday loans and personal loans we need to look at both types of loans and see how they work.
A payday loan is a short-term small loan that the borrower repays in full when he gets his next pay at work. The repayment includes service fees. Compared to personals loans, payday loans tend to have higher rates of interest and additional fees. If you cannot repay the whole amount, alternative repayment options may be available, but the default/late repayment fees or charges can be very high, too.
Payday loans are based on your income. If you have a full-time job and a higher salary, you can borrow more because the amount you receive from your employer guarantees that you will be able to repay the loan without putting yourself into substantial financial hardship. If what you earn hardly covers your living expenses, you may have only a small loan approved.
In a nutshell, the lenders limit the amount to what you can afford to repay. For example, if at least half of your income comes from Centrelink, and the repayments on your loan would exceed 20% of your income, you will not qualify for a loan.
Payday loans are sometimes called “cash loans” or “small loans”. These loans are great when you need money in an emergency. If you need some cash to cover rent or overdue bills, travel expenses or school fees – this may be a good solution as it does not require a lot of paperwork or going through credit checks. Once confirmed, they sometimes may be paid as quickly as in a couple of hours.
According to ASIC, a payday loan is a high-cost short-term loan that includes small amount loans up to $2,000 that must be repaid between 16 days and 1 year as well as loans borrowed over longer periods.
These loans are usually repaid by direct debit from your bank account or a deduction from your pay on the day you are paid. You can apply for a payday loan online. The lenders must check all applications thoroughly, but the application process is simple, fast, and stress-free. Borrowing money is no fun, so knowing that you do not have to jump through hoops to get the money – especially in an emergency – makes it a bit easier.
The most important thing to remember is that a payday loan is usually a small loan that you really need – if your car broke down and you need it to get to work, applying for a payday loan sounds like a good option. Borrowing money to repay it when you get paid to make some impulse purchase is most likely a bad idea unless the loan is quite affordable and the special deal you are getting on the purchase is worth it.
Payday loans are easier to repay than personal loans simply because they are smaller, and you do not have to repay them for months. They are also easy to get so it may be tempting to get the loan every time you need some extra money that way. It is a more costly way to borrow and may not help you financially in the long term.
Applying for a personal loan from banks or credit unions is not such a quick, simple and straightforward process as applying for a payday loan because it usually involves checking your credit score.
A good credit score is a good sign that you will be able to repay the loan on time. If lenders see that your credit rate is not perfect, they may still approve your loan but hike up their interest rates just in case, especially if you apply for an unsecured personal loan.
The main difference between payday loans and short- or long-term personal loans is that people applying for a personal loan generally need a larger amount of money.
Using the example that we used before if your car broke down and you need to fix it – you may need a payday loan. If, however, you want to but a new expensive car, a payday loan would not cover your expense – you need to enquire about personal loans.
Likewise, a payday loan could be enough to cover a visit to the dentist, but if you need to pay for dental implants or elective surgery you may want to use a personal loan.
Below average, Short-term personal loans usually have fixed interest rates which means predictable payments. Variable rates may increase the cost of repaying the loan unless you are able to pay it off quickly. If you check your credit score and do your research before applying for a personal loan, you will avoid applying for a lender who requires a higher score and thus lowering your score even further.
Any loans may be more difficult to obtain if you already have some other existing loans that you are paying off. The lenders know that approving yet another loan could put you under more financial pressure instead of helping you.
As you can see, there are some similarities between the payday loans and the personal loans but there are many differences as well. If you understand the differences, choosing the best solution to your financial problems – a loan that will be easy to get and easy to repay – will be much easier.