A payday loan is a small short-term loan characterized by high interest rate for the purpose of meeting urgent cash needs prior to the borrower’s next payday. Usually, these are small amounts of loans and they are to be paid back soon, within weeks more often than not. Payday loans bring cash as soon as possible and are as close as possible – no documents and no credit check.
This makes them suitable for people who require funding quickly and who may not access conventional loans. Contrary, because of their short repayment period and extremely high costs, they are relatively dearer than other loan products.
A personal loan is a more conventional variety of credit that is generally provided by banks, credit unions, as well as other online lending institutions. They are needed in amounts of from several hundred to several thousand dollars and are repaid over a longer period of time – from one to seven years.
Personal loans can also be secured or unsecured, thus unsecured does not call for any security deposit. The interest rates for personal loans are somewhat lower than that of payday loans and the interest rates which are charged on such loans are inexpensive for the persons having good credit status.
This makes personal loans cheaper methods of financing different needs that may for example be a home renovation project, unexpected medical bills or amount to pay off an existing debt.
Another major dissimilarity between payday loans and personal loans is the kind of interest charged. Payday loans, however, have much larger APRs than most other loans, and they can range between 400% to as high as 1000%. On the other hand, personal loans have considerably low APRs that range between 6% and 36% based on the credit history of the borrower.
This is because personal loans attract lower interest rates than a number of other forms of credit facilities hence the amounts charged as interest are smaller and therefore are more affordable to a number of borrowers who need credit for an extended period.
Payday loans have less flexible repayment period, with regard to the fact that they must be paid in full within the two to four weeks. This can again be a problem for borrowers who may find it hard to repay the loan within the short time frame.
Personal loans on the other hand have more flexible repayment terms that may on average take 12 to 84 months. This means borrowers will take longer to faithfully pay their loans, thus easing the pressure throughout the month.
The ability to prefer the one or the other type of a loan mostly depends on the individual conditions of a borrower. Payday loans are appropriate with the people who wish to borrow a little amount of money with the short term to pay it back. For those with the need to borrow a larger amount or require a longer payback period, a personal loan would ideally be more attractive given its comparatively cheaper interest rates and more flexible terms.
Payday loans and personal loans are designed to meet different needs. Payday loans provide quick cash but at a heftier price compared to a normal overdraft, plus they are repaid in a shorter space of time.
Personal loans are more easily available and come at lower cost than other forms of credit and better yet for people with good credit scores. By practically differentiating between a secured and an unsecured loan, borrowers will be able to adopt a suitable financial strategy to take when seeking a loan.
