What Are the Differences Between Payday Loans and Personal Loans?
Loans are a good way to escape the claws of bills and unexpected expenses, particularly if you turn up low on cash or have no savings at the moment. But even better is the fact that intending borrowers have different loan options to suit their specific needs. There are special loans for a home purchase, short-term usage, as well as loan types without collateral.
Two of the most common loan types are payday and personal loans. Since most lenders offer them together, the lines between them are usually blurred to many customers, and it’s hard to tell the difference. Here’s all you need to know about distinguishing payday loans from personal loans and how to get both of them through brokers like WeLoans.
What Is a Payday Loan?
Payday loans are a perfect financing option if what you need is a short-term loan. Most payday loans offer as little as $1000, or even less, and expect borrowers to repay using their next paycheck. The repayment term typically lasts between two to four weeks, making the loan best suited to financial emergencies requiring urgent attention. You can search payday loans online with WeLoans for some of the most convenient offers on the market.
How Do Payday Loans Work?
Perhaps one of the easiest types of loan to obtain, you do not need collateral or hard credit checks when taking out a payday loan. This type of financing is available at online payday lenders or through lending brokerage firms such as WeLoans.
You simply have to apply for a payday loan indicating your need, and you can expect approval within minutes. A vast majority of payday lenders also make loan offers available to individuals with a bad credit check. They typically provide loans without conducting hard credit checks, thereby making the process swift without worsening the credit score of borrowers.
What Is a Personal Loan?
Personal loans are generally regarded as a more long-term source of funding. You can get a personal loan from traditional banks, online lenders and credit unions. This type of loan allows you to take up to $100,000 from some lenders to be repaid in monthly installments. Many borrowers use personal loans for diverse purposes, ranging from debt consolidation to private needs.
How Do Personal Loans Work?
Taking out a personal loan is significantly different from what obtains with a payday loan. Since personal loans are usually unsecured, lenders have strict requirements about who can be eligible for funding. So, instead of collateral, you may need to show a good credit score and above-average debt-to-income ratio.
If you do not qualify for a personal loan, given those factors, you can decide to take out a secured loan or use a co-signer. Secured loans require that you produce some form of valuable property as collateral for your loan, while co-signed loans typically involve having a guarantor with a strong credit history.
How Both Loans Differ on the Following Metrics?
From the above information, you can already guess that payday loans and personal loans are considerably different. However, there are several points that make the gulf of difference between both loans even more noticeable. Here are some of them. You can find out more about payday loans from a financial writer named Nabila Yusuf at WeLoans.
The loan amount available for payday and personal loans is different. For most payday loans, the maximum amount that you can receive is $1,000. This amount may even be lower in some states, for example, California which permits payday loans of up to $300. However, with personal loans, you are allowed to take out between $1,000 to $30,000. Some lenders may allow up to $100,000, provided you meet all the stipulated conditions.
Annual percentage rate or APR is another factor of difference between both types of loans. The APR attached to payday loans is astronomically enormous compared to other credit options. A culmination of the simple interest rate, finance charge, and other fees could see your payday loan return an APR of over 400%. By comparison, personal loans have fairly lesser APRs, with most loans having APRs ranging from 6% to 36%.
You may repay a personal loan in monthly installments for as long as 12 to 84 months. This would depend on the amount you’re borrowing and your agreement with the lender. But with payday loans, since they are short-term funding options, you have to repay within two to four weeks. This time frame is usually considered enough for borrowers to receive their next monthly paycheck after taking out a loan.
Places Where You Can Borrow From
Payday loans are often available at payday lenders. During the application, you’ll be required to provide supporting documents such as proof of income. Most lenders will also conduct a soft pull for regulatory purposes.
On the other hand, you can apply to get personal loans at credit unions, traditional banks, and online lenders. For credit unions, it is important to know that they only provide credit facilities to their members. However, WeLoans has a large network of online lenders that you can apply to, compare offers and choose the most suitable funding option.
Which Should You Go For? Payday Loans or Personal Loans
If you’re considering taking out a loan and you’re stuck between payday loans or personal loans, there is a way out. Before choosing any specific type of loan, it would help to consider the reason why you need a loan in the first place. If it’s for a long-term, capital-intensive project, then you may want to opt for a personal loan. However, for short-term emergencies worth less than $1000, payday loans are better.
Similarly, it is important to consider your credit history and the overall cost of taking a loan. While personal loans allow you to repay in installments and help with debt consolidation, payday loans do not. Besides, payday loans are significantly more expensive than personal loans. Most people even consider them predatory, capable of trapping you in a cycle of debt. So, if you want a loan with affordable APRs that can build your credit profile if you repay early, then you should choose personal loans.