Payday Loans vs Personal Loans: Things You Need to Know
The main difference between a personal loan and a payday loan is that you can get the latter the same day and for a short period of time. Usually, the available loan amounts are lower than that of personal loans – up to $5,000. They are also called cash advances or fast loans.
What is a personal loan?
A personal loan is a loan provided by a bank on the terms of payment and repayment.
The loan is provided in cash or via bank transfer to a bank account. Before that, the bank must assess the client’s solvency. If he or she has a small income or bad credit history, it may be necessary to provide collateral or a guarantor.
Banks or other credit organizations are engaged in providing loans. All of them must have a license to operate in the USA. In addition, personal loans are provided by non-bank credit organizations and microfinance institutions (MFIs). Individuals or legal entities may act as borrowers.
Types of personal loans
The two most popular types of personal loans are interest and interest-free. In the first case, the borrower undertakes to pay interest regularly after receiving the money.
Interest-free loans are often called installments. The essence of the program is that the contract is concluded between the seller and the buyer. In this case, you do not need to pay interest for the purchase but you need to make an initial payment.
Another classification of personal loans includes targeted (used strictly for the specified purposes) and non-targeted (you dispose of the amount at your own discretion).
Popular personal loans
- Mortgage. The purchased object serves as collateral. The peculiarity of the mortgage is a large amount and a long payment period;
- Car loans. Upon receipt, the borrower is obliged to insure the vehicle – these are the requirements of the current legislation;
- Construction loans or agricultural loans;
- Personal non-target loans. The funds can be used for any needs. Eligibility criteria are relaxed. No paperwork.
- Education loans.
The borrower repays interest under the contract according to an annuity or differentiated scheme. In the first case, you make payments in the same amount during the loan period. In the second case, the amount of the mandatory monthly contribution decreases as you repay the debt.
Advantages and disadvantages of personal loans
- You immediately satisfy the need for possession of some thing;
- The terms of cooperation are transparent;
- The interest is fixed and much lower than when applying to an MFI;
- Available for all categories of citizens;
- The debt can be repaid early without penalties;
- Various conditions. Any goals, deadlines and amounts.
The disadvantages are the need to seek guarantors for large loans. A deposit may also be required as a guarantee of the client’s solvency. The borrower will need to do major paperwork and prove his/her income.
What is a payday loan?
A payday loan is a short-term loan that can help you cover unexpected cash needs until you get your next paycheck. The loan is usually repaid within two weeks—or close to your next payday. During this period, you manage the money at your own discretion.
Distinctive features of a payday loan:
- You can repay your loan early and reduce the interest;
- The lender makes a decision within 15 minutes;
- You can apply and get a payday loan remotely – online;
- Daily interest rate;
- The loan term and APR are determined by the lender.
Why are payday loans so popular?
Despite the high interest rates, the popularity of payday loans is constantly growing. This is primarily due to the simplicity of getting money. You do not need to provide an income certificate or have a good credit history. Usually, you only need an ID and a desire to get money.
Pros and cons of payday loans
MFI services are used by citizens who do not have the time or opportunity to apply to the bank. The reason is the minimum requirements for the borrower; you only need to have an ID. An application can be submitted online 24/7. Funds a transferred into your bank account within 24 hours (sometimes even the same day).
The advantages of payday loans include:
- Online application;
- Immediate approval;
- Fast funding;
- Bad credit is ok;
- No paperwork;
- No collateral;
- Age over 18.
The disadvantages include small amounts in the range of $200 and $5,000 and a high interest rate. Overdue debts are sold to collectors or go to court.
Payday loan vs personal loan: conclusion
It’s up to you to decide how to get money. Assess your goals and needs. If you are planning major expenses, the best solution will be a personal loan. If you need a small amount and quick approval without regard to your credit score, you’d better give preference to a payday loan.
In any case, you need to plan finances and assess the level of your solvency – you must be sure you will be able to pay off the loan on the due date, without delay. Today, you can pay off the debt remotely – online. This allows you to plan expenses correctly, not to miss payments, and avoid overpayment.
Tags: money, payday loans, personal loans