Money lenders offer several loan options to borrowers whenever they are in a cash crunch. Of the many well-known ones you’ll ever get, payday loans and personal loans from money lenders are the top two.
Though both can be a quick way to get you cash, they differ significantly in terms of how they are offered, the costs involved, and associated risks.
So, in this post, we’ll discuss in depth the difference between payday loans and personal loans.
What is a Payday Loan?
A payday loan, despite its high cost, is a convenient, short-term solution designed to help individuals bridge the gap until their next paycheck. It offers quick access to small amounts of money, with the understanding that you’ll repay the loan, along with a fee, on your next payday.
Notably, applying for payday loans is fast, often taking only a few hours, and require only a couple of requirements, such as proof of income, a bank account, and an ID.
However, while payday loans are convenient, there is a catch. Usually, they have phenomenally high interest rates and fees. If you cannot repay the loan quickly, the costs go up, trapping you in an endless debt cycle.
Notably, with the high interest rates and fees, people often take a second payday loan to pay for the first, aggravating the situation further.
What Is a Personal Loan?
Personal loans are more traditional and you can them from banks, credit unions, or licensed money lenders.
Personal loans, on the other hand and unlike payday loans are more flexible. They typically involve larger amounts and longer repayment terms, ranging from months to years. This flexibility makes them ideal for managing larger expenses or consolidating debt.
Notably, the application requirements for a personal loan frequently involve nothing more than a credit score check and a glance at the statement of income.
The interest rates charged on personal loans are usually much lower, especially when your credit is in good standing, compared to payday loans. Also, the terms are accommodating, allowing you to budget over a period.
Key Differences Between Payday Loans and Personal Loans
1. Loan Amount and Repayment Terms
Payday loans are small and short-term, while personal loans are more and longer-term. You’ll require a payday loan if you feel the desperate urge for a small amount to meet your immediate financial obligations before your next payday.
Conversely, you will get the best benefit from a personal loan if you seek a much more huge amount to spread the payments over time.
2. Costs and Interest Rates
Payday loans are known for exceptionally high interest rates. Personal loans, in comparison, have much lower interest rates, especially from a suitable and licensed money lender.
3. Risk of Debt Cycle
While payday loans are to be paid as soon as possible, inability to pay results in piling fees and interests, leading to a dangerous borrow-spend-reborrow cycle.
On the other hand, personal loans, with longer repayment terms and generally lower rates won’t lead to the risk of bad debts.
Which One to Choose?
Payday loans pose commitments, but so do personal loans. Therefore, the type of loan you choose between the two depends upon your situation. For instance, if you urgently need small cash and are assured of returning that money with your next paycheck, a payday loan can be okay, but with extreme caution.
On the other hand, personal loans are way more innovative and much more feasible where there is a pressing need for extra cash or a motive to avoid additional costs and other risks related to payday loans.
Therefore, take your time and give yourself time to think it through. Importantly, find out if you can afford the repayments or if there is another more viable way out, such as borrowing from a relative or friend.
Conclusion
Payday loans serve different purposes than personal loans, and being aware of this will prevent you from making many unnecessary financial and borrowing mistakes.
Importantly, before making a borrowing decision, it’s always wise to seek professional advice. At Power Credit Enterprise, we understand that every financial situation is unique. We assess your needs and circumstances to provide personalized advice on which loan is best for you. Therefore, you can contact us for financial advice and loan inquiries.