Learn Which Option Will Be Better for Your Finances
Personal loans and payday loans may seem similar on the outside, but there are quite a few big differences that set these two options apart. Depending on your credit and the amount you need to borrow, you will want to know what you qualify for before you apply for a loan.
What are the key differences between a personal loan and a payday loan?
Personal loans and payday loans may both be useful when you need an extra boost to your finances, but that is about where the similarities end. Loan amount, loan term and cost – among other factors – vary widely between these two options.
- Loan Amount – You may be able to borrow as much as £100,000 with a personal loan though most lenders only offer around £50,000 to borrowers with excellent credit. With a payday loan, you can typically borrow anywhere from £50 to £1000 – but some offer loans up to £5000
- Cost – Personal loans will be cheaper overall – with interest rates that cap out at around 36% – but you will have to have good to excellent credit. Payday loans are generally much more expensive, but they don’t have strict credit requirements.
- Loan Term – Personal loans often have a minimum term of 12 months and can last as long as 7 to 10 years. Payday loans, on the other hand, have short terms of two to four weeks.
Difference between payday loans and personal loans – Other Factors
- Eligibility – Personal loans offered by banks and credit unions have strict eligibility criteria, often requiring borrowers to have good credit and a strong financial background. Payday loans are much more flexible, and lenders usually only require that borrowers have a regular source of income to qualify.
- Lenders – Personal loans are offered by banks, credit unions, online lenders and peer to peer lenders. Payday loans tend to be offered by lenders that specialise in short term lending and check cashing services.
How Much Will Each Option Cost?
The cost of each product varies widely between lenders and the state you live in. For a personal loan, you won’t have to pay more than 36% when you borrow. This is still a high interest rate, but its much lower than what you will get with a payday loan or other short-term loan. The exact interest rate you receive – along with your terms – will be based on your credit history, if you have collateral, the amount you want to borrow and the term of the loan.
On the other hand, payday loans can have APRs with three – or even four – digits. The actual cost will depend on the state you live in. however, its important to note that APR represents yearly cost. Most lenders also represent the cost of a loan as a fee you pay per £100. But no matter how its shown, payday loans are still more expensive than personal loans.
How Can I Decide Which Type of Loan is Right for Me?
Deciding between a personal loan and a payday loan will likely depend on the amount you need to borrow as well as your credit. Asking yourself the following questions will help you decide which is the best choice.
- How Much Money Do I Need to Borrow? If you need to borrow between £50 to £1000, a short-term loan may be better because personal loans tend to have minimums between £1000 and £2000.
- How Fast Do I Need the Money? – Short term loans usually have faster turnaround times than personal loans because less is involved in the approval process. However, many personal loan providers are moving online, so quite a few have the same processing speeds as short-term lenders.
Difference between payday loans and personal loans – Credit & Cost
- How is My Credit History? If you have good to excellent credit, you could stand to save money by getting a low interest personal loan rather than a high cost payday loan.
- How Much Will It Cost Me? Ultimately, it comes down to your monthly payments and total repayment amount. Be sure to compare multiple options and explore those lenders online calculators to see which is most affordable for you.
Bottom Line
There are quite a few big differences between personal loans and payday loan, so you will want to be prepared when you are looking to borrow.
