Personal Finance

Payday Loans or Personal Loans: What’s the Difference?

When it comes to various lending solutions, it’s necessary to compare several options before you make the decision. Borrowers who are short of cash often struggle with what lending offer to choose. Payday loans and personal loans have some similarities but they also differ in terms of interest rates, the amount you may take out, and the repayment term.

In order to avoid pitfalls and make the best choice tailored to your needs and preferences, keep on reading to learn about the main differences between these two offers. Check their pros and cons and select the option that is the best fit for you.

How Do The Loans Work?

So, what do these lending options mean? It’s important to know these terms so that you understand what makes them different and what borrowing option is more suitable for you.

Payday Loans

This is a near-term borrowing option offered to consumers who feel pressed for funds. The time frame for repayment is usually between two and three weeks or one month at maximum. Additional funds are issued to the clients for this period and are later withdrawn together with the interest rate and other fees on the next salary day.

Such a lending option comes with higher costs and interest rates as it’s given for a short period. It can’t be utilized to cover long-term money goals. Generally, the lenders issue up to $1,000 in payday emergency loans for bad credit.

Personal Loans

This is a long-term borrowing option offered to consumers who need to finance big-ticket purchases or cover large expenses. The timeframe for repayment is usually from one to several years. Additional funds are issued to the clients for this period and are later returned in monthly installments.

Such payments are to be made each month until the whole sum is repaid together with the interest. Such a lending option comes with lower fees and more flexible interest rates. It shouldn’t be taken out for short-term money needs. Generally, the lenders issue up to $100,000 in personal loans.

Personal loans may be secured and unsecured. The first option is more favorable among borrowers as it allows borrowers to obtain extra funding without backing it up by collateral. A secured lending option is issued only when the borrower provides security on the debt in the form of a valuable asset such as a house or an auto. It’s necessary to admit that borrowers may lose their assets in case of default but the rates and terms for a secured personal loan are the most affordable.

What Is the Difference Between Payday Loans and Personal Loans?

As you can see, both of these lending options are issued to applicants who are short of funds. The money may be utilized for a variety of purposes. Here are the main differences between these two loan types:

1. Interest rates.

Payday lending options are given to consumers for several weeks so creditors want to earn more interest on such solutions.

Hence, the interest rates for payday loans are much higher than those for personal loans and can range up to 400% APR.

The interest rates for a personal loan agreement may vary between 6% and 23% depending on the amount you want to borrow and other eligibility criteria.

2. Rates over time.

The number of rates necessary to pay for a payday loan grows up over time. At the same time, choosing a personal loan will allow you to have a set interest for the whole repayment term. Borrowers are charged interest only on the outstanding loan sum so a variable interest decreases over time.

3. Extra charges.

Personal loans are more stable regarding charges as there are no hidden fees. You know your fixed rate for the whole period.

Creditors that issue payday loans may charge additional fees such as origination fees, prepayments or late charges, etc.

Questions to Ask Yourself Before You Choose a Loan

Even when you feel pressed for cash and think of taking out a lending option, you need to ask yourself the following questions. They will help you understand which solution works best for you or whether you may need to search for alternative methods.

#1 Do I actually need a loan?

When you live paycheck to paycheck and need to fund an urgent money need, requesting a loan may sound reasonable. However, you should ask yourself if this debt is worth paying off. If you just want to make a big-picture purchase it may be wiser to wait a few months and save the cash.

#2Do I have enough means to return the debt on time?

It’s essential to understand that any loan is your debt and you are responsible for its repayment. Can you afford to make on-time monthly payments? Is your income enough to keep up with monthly installments for a personal loan? Will you be able to repay a lump sum on the next salary day to cover a payday loan?

#3 Will it affects my rating?

Taking out a payday loan for a short period won’t affect your credit score. Getting a personal loan for several years may seriously affect your rating and your ability to qualify for lending options in the future.

Remember that if you default and fail to make regular payments, your credit may drop. As a result, you won’t be able to obtain flexible rates and terms next time you are in financial trouble.

#4 Are there alternative options?

Although you may acquire a payday loan with a poor rating, getting a personal loan requires good credit. If you can’t qualify for a lending solution, you may try alternative ways such as getting a cash advance, using a credit card or asking your family and friends to help you.

In conclusion, payday loans and personal loans differ in many ways including the sum you may obtain, the rates, and the general repayment term. Take some time to review your options and make a smart financial move tailored to your needs. Always read the fine print to secure yourself from hidden fees or unpredicted charges.

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