There are significant differences to note between a payday loan and a personal loan and we’re going to discuss these to make sure you know which option will suit your needs and circumstances best.
The key differences between personal & payday loans
A payday loan should be considered for financial emergencies as it is a short-term, high interest loan that needs to be repaid once you get your next pay check.
A personal loan offers higher loan amounts and is best suited for longer term financing or for larger expenses. A personal loan’s interest rate is lower than that of a payday loan because of the loan term difference between them.
Similarities between payday & personal loans
Both personal and payday loans offer flexible loan amounts and can be obtained online. In addition, they are both once-off loans since they offer a lump sum of cash that must be repaid in full.
To apply for either loan type is fairly easy and can be done on a mobile app, online via a lenders website or in-branch if one is available.
That being said, one defining feature of a payday loan is how simple the loan application is and how quickly you can have it credited to your account.
With both payday as well as personal loans you need to meet the lenders minimum lending requirements which means you will need to pass a credit check as well as affordability checks.
Payday loans - what you need to consider
Why payday loans come with high interest rates
Payday loans have a higher interest rate than personal loans, but if you are to ask yourself why, here is the answer that you’re looking for.
Basically, if you take a payday loan or a quick cash loan the reason the interest is higher is because the loan term is very short. The lender needs to make a profit on the loan and thus a higher interest rate applies.
Are payday loans the better option?
This depends on how urgently you need the cash and the loan amount you wish to borrow. A payday loan usually offers a much lower loan amount and will not be able to offer you large sums.
However, if you are in an emergency situation, which requires immediate access to cash, a payday loan is your best bet. A payday loan can be approved within minutes, giving you the access you need to instant cash. Whether it be a medical, household, or car repair emergency – a payday loan gives you access to instant cash.
If you would like to loan an amount that is $2,000 or less than yes, a payday loan is the perfect loan for you. If you need to loan a higher amount, you would have to consider a personal loan.
Another great benefit of payday loans is that if you wish to apply for a loan and have your loan amount within 24 hours - a payday loan can get you just that!
If you have good credit, you may be able to access a small loan that is in the region of a payday loan at personal loan rates. Check to see if your bank has any pre-approved short-term loan offer for you.
The payday loan trap
If you've taken out more than two payday loans within the last 6 months, you may have fallen into the payday trap. This is simply when a person becomes dependent on payday loans to cover their financial needs on a regular basis.
While one payday loan may not be too difficult to manage or expensive multiple payday loans become excessively expensive and can cause serious dependence and financial hardship in the long run.
Easy way to decide if you need a payday or a personal loan
Using a loan comparison site is your best option. Most sites have a loan calculator function that will help you determine your loan amount, loan repayment period and loan repayment amount.
Applying online for a payday loan or personal loan is not only easier but, you will have an instant answer on your loan application.
A loan comparison site also allows you to compare all reputable lenders and this will help you make informed financial choices.
When a personal loan is best
- When you need a large sum of money over $,2000.
- When you have good credit and can secure a low interest rate.
- When you do not have an excessive amount of debt and can afford the new loan.
- If you can afford the loan repayment for an extended period of time.
- When you do not need the cash urgently.
- If you wish to consolidate debt.
When a payday loan is best
- When you need a small sum of cash of $2,000 or less.
- When you need the cash urgently.
- When you do not have an excessive amount of debt.
- When you intention is not to consolidate or repay existing debt.
Research loans before you decide to apply
If you’re thinking about taking out a loan, but you're still unsure, do the necessary research, ask the questions that you would like to ask and make sure you get the answers you need before making any financial decision.
Keep in mind that the longer the loan term and the larger the loan the more research you need to conduct before taking out the loan.
This is because it will be a long term commitment and the repayments will be a part of your budget and life for a long time to come.
In addition to making sure you can afford the repayments, you need to consider what the interest rate will be, what additional fees you will have to pay as well as any penalty fees that apply.
Always make sure that you understand all the information provided to you by a lender. Ensure you understand the terms and conditions of either your payday or personal loan and then enjoy the benefits of being able to access finance that suits your needs.