A personal loan and a payday loan may be quite confusing especially since they both start with a ‘P’, huh! Getting to know what these loans are and their differences can help make better choices in case you need some credit.
Payday Loans
A payday loan is a short-term credit mostly offered by online lenders and is repayable with interest within the next paycheck.
Personal Loans
A personal loan is an installment type of credit borrowed from banks, online lenders, and credit unions also paid back with interest.
The main similarity between these two loans is their purposes. Both loans can be used for anything and can be obtained from online lenders. Apart from these two, the other features are completely different.
What Are the Major Differences Between a Payday Loan and a Personal Loan?
- Loan Term
Payday loans are short-term credits and therefore require payment within the next paycheck. Their terms range from 2 to 4 weeks depending on the loan agreements.
A personal loan, on the other hand, has a lengthier compensation term. The loan can go anywhere from 2-5 years. Other times, this period can be extended.
- Interest Rates
Payday loans are known for their high-interest rates. Their APR ranges from 391% to 400%. Even though the loan is of a short-term type, the interest included is way higher.
The main reason for these high interests is the risks involved. No collateral is attached during the applications. Also, no credit checks are done leaving lenders at high risks of possible defaults.
You can still get payday lenders with favorable terms like the best online payday loans CT. Do your research to get other similar lenders.
Personal loans have an interest ranging from 4% to 36%. These rates are mostly determined by your credit score and involvement of collateral.
That means that a high credit score will have low interests while a poor credit score will result in high interests. Also, secured loans tend to have lower rates than unsecured ones.
- Amount Borrowed
Payday loans have small amounts ranging from $50 to $1,000. These amounts depend on the lender’s trust and your level of income. During application, you’ll be required to provide your employment information, your national Id, and active account statements.
The employment information will reveal your income level from where the lender will base the level of loan to be borrowed. If you have a high income, the payday loan amount will also be high.
Personal loans range anywhere from $1,000 to 50,000. The amounts can increase depending on your credit score, debt-to-income ratio, income level, age, and lender’s trust.
- Loan Sources
As mentioned earlier, payday loans are offered by online lenders. For this reason, they have a fast application process, fast approval time, and fast automatic balance transfer in case of approval. They also have 24-hours operational services and hence borrowers can apply for a loan at any time.
Personal loans can be accessed from physical banks, credit unions, and online lenders. The online lenders can also be traditional banks with an online presence.
- Eligibility
“Personal loans offered by banks and credit unions have strict criteria for eligibility. They generally require borrowers to have good credit and a fairly strong financial background,” according to Money Mindset.
Payday loans are flexible as they only require borrowers to have a proper and regular source of income for qualifying. For this reason, personal loans have a longer application process than online payday loans.
The good news is that banks have in recent times tried to minimize the personal loan request time through online applications.
Conclusion
A personal loan and a payday loan are very different. It’s upon you to know which loan best suits your situation.