Are you torn between choosing payday versus personal loans? Read on to discover the difference between these two types of credit solutions. And before you ask – no, they are not the same. In fact, they are poles apart from each other.
What is a Payday Loan?
Payday loans are short-term, high-interest, unsecured loans that can provide consumers money to get by until their next paycheck gets credited. The principal is typically a portion of the next paycheck. The income of the loan taker is the only key eligibility criteria here.
Pros of Taking a Payday Loan
Payday loans are often not subject to a credit check because the borrower’s next paycheck secures them. For borrowers with weak credit or no credit, these are an appealing option.
Payday loans provide quick money. So, when you apply for a payday loan, you might be able to get the cash you need right away – within minutes.
Cons of Taking a Payday Loan
Payday loans have relatively high-interest rates. Although the daily rate may not appear to be too frightening, the Annual Percentage Rate, or APR, can be quite high. The factor to keep in mind is that these are meant for bridging your monthly expense gaps and are not a long-term credit solution.
Payday loans have a relatively short repayment period. They must be paid back within around 3 months’ time. If your credit requirement is for a longer duration than this, then payday loan is not the right option for you.
What is a Personal Loan?
A personal loan is a short- or medium-term loan used to pay for things like weddings, renovations, and vacations. Borrowers have complete control over how they use their loan funds. The loan is disbursed based on the credit score of the borrowers and their ability to repay the loan. It is generally paid back over a few months or years through fixed equated monthly installments (EMIs). Personal loan interest rates differ from one bank to the other.
Pros of Taking a Personal Loan
Personal loans are paid back in monthly installments. Therefore, your monthly payment will remain the same, allowing you to budget for how much you owe.
Personal loans do not necessitate the use of collateral as is the case with payday loans. The charges associated with personal loans are usually small. You may even find personal loans in the market that do not charge any processing fees, prepayment fees, etc. Of course, all that depends on your preexisting financial relationship with the lender and your credit score.
Cons of Taking a Personal Loan
Personal loan APRs can be high if your creditworthiness is nothing to boast about. Also, since personal loans are typically provided by mainstream financial institutions, you might simply be unable to get a loan if your credit score is low.
Your debt equity plays a vital role. If you are already carrying a sizable amount of debt with respect to your monthly income, it is likely that your application for a personal loan will be rejected.
Key Differences Between Payday Loan VS Personal Loan
Cost of Credit:
A payday Loan carries a relatively higher interest rate when compared to a personal Loan. Personal loans are available at reasonable interest rates, but the difference is not always huge, especially if your credit rating is poor.
The tenure of Personal Loans can range anywhere between 12 months and 60 months. In comparison, payday loans must be paid back within a few months. Borrowers who are unable to repay the cash borrowed must renew the loan, resulting in a new loan account.
Personal loans allow one to borrow up to INR 25 lakhs (depending on the eligibility criteria), which is a much greater amount when compared to payday loans, which usually run only into a few thousand rupees. The upper cap on borrowing in the case of a payday loan is entirely dependent on the salary that you draw each month.
To avail personal loan, potential borrowers must submit KYC documents, bank statements, and income verification documents. If these documents are in order, then the loan can be processed. In contrast, the only requirement for applying for a payday loan is that the applicant has a continuous source of income and is salaried.
Personal loan approval process takes time and can stretch up to a week to a fortnight. Payday loans are more convenient because they offer a rapid application and approval process.
Personal loans are available from almost every bank. On the other hand, payday loans are only available online through RBI-licensed NBFCs or non-banking financial companies.
Like personal loan lenders, the repayment history is reported to the credit rating agencies by payday lenders too. Borrowers with poor credit history can leverage this fact to their advantage. Here’s how: since payday loans are usually for a small amount, one can quickly repay them, which consequently reflects on their credit scores positively.
Also Read: Top 6 Reasons to Apply for a Personal Loan
What Credit Solution to Avail?
It boils down to your financial necessity. If you are on the lookout for a quick short short-term loan, payday loan is right for you. If the need for credit is long-term and the amount is high, personal loan is a better choice. The important factor to consider is your ability to repay them on time and to weigh the cost to benefit objectively.
How to get an Instant Personal Loan?
- Find a reliable marketplace like Finpedia that offers you the choice between several RBI-licensed lenders.
- Now, compare your options by analyzing interest rates, processing fees, etc.
- Link your phone number and generate an OTP.
- Fill out the application to share your basic information and upload the required documents (for first-time users).
- Select the loan amount and wait for the application to be processed.
It is likely that your online loan will be sanctioned in a matter of a few minutes.