How many times have you come across the words payday loan and personal loan while searching for options online and wondered, “Hmm, what’s the difference between these two?”
We admit that these loans sound almost the same, but there are a couple of differences that set them apart. The first giveaway is the names itself. If you are thinking about getting a payday advance but don’t know if it’s the right option, you have come to the right place.
The following chart will explain the differences between a payday loan and a personal loan so that you can make an informed decision.
|Particulars||Payday Loan||Personal Loan|
|Definition||A payday loan, also known as an advance loan or same-day loan that is used for small emergencies.||A personal loan, also known as a consumer loan is used for personal needs such as paying for medical bills, vacation, making investments, etc.|
|Loan Eligibility||A payday loan is offered to people who are above 18 years old and hold an ID granted by the government. In order to qualify for the loan, you need to present proof of income, based on which your loan amount will be set.||A personal loan requires detailed information in addition to what you provide for a payday loan application. This information includes your credit score and credit history that helps the lender determines whether you will be able to afford the loan or not.|
|Loan Terms||The repayment time for a payday loan is usually between 3 months to less than a year. |
If a borrower is unable to pay the amount within the selected time frame then they can renegotiate the loan terms with a small fee and new interest rate.
|The repayment time for a personal loan is from 1 year to 3 years.|
|Approval||A payday loan is approved almost immediately. It’s also possible that you might get approved in a day if your application has all the right information.||It may take a couple of days for your personal loan application to get approved. Since, the lender will be doing a soft and hard inquiry into your credit score; they will need to make sure that you tick all the eligibility boxes.|
|Interest Rate||Payday loans have a high interest rate compared to other advance loans. This is because you might get the loan on the same day and the lender might not consider your credit score. |
In some cases, the interest rate for payday loans is calculated on a weekly basis. The APR on a payday loan is around 190%.
|The interest rate on a personal loan is quite low in comparison to a payday loan. The APR on it starts from 5% to 25%.|
|Loan Amount||The loan amount for a payday loan is usually between $500 and $5,000. Some online lenders extend the amount to $15,000. However, the higher the amount, the higher the interest rate. This does not affect the loan terms though.||The loan amount for a personal loan varies from lender to lender. It can be as low as $300 to $60,000.|
|Collateral||Since the loan amount for a payday loan is low, there’s usually no collateral. However, this depends on the lender too.||A personal loan is always secured. A lender will usually ask you put up your car, house or savings account as collateral. This is one of the biggest drawbacks of a personal loan because if you default on the loan, your collateral might be seized.|
|Credit Check||While a payday loan does require you to have a “Fair” credit score, it also considers your personal circumstances to determine whether you are eligible for the loan or not.||The approval of a personal loan heavily relies on your credit score and credit history. If the lender sees any default payments in your credit history then lender might not give you a loan.|
One major difference between getting a payday advance loan and a personal loan, which also happens to be a benefit, is that the latter can help you improve your credit score. On the other hand, even if you use a payday loan to pay off your small debts, it won’t impact your credit score as credit bureaus do not recognize it.
Both loans require you to have a long employment history and at the same company. This ensures the lender that you have a steady income and won’t default on the payments. To make the payments on time, create a budget using an online calculator and determine how much you can afford in weekly and monthly payments.
So, before applying for a payday loan, take a look at your finances and only then fill out the application.