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Personal loan vs payday loan: Understanding the key differences

Angelina Greer by Angelina Greer
September 20, 2023
in Business
0

Personal and payday loans often cover unexpected expenses or meet urgent financial needs. While both can provide quick access to funds, they differ significantly in interest rates, repayment terms, and borrower eligibility. Let’s understand what personal and payday loans are and their differences.

Personal loan

Article Summary show
What are personal loans?
What are payday loans?
Differences between personal and payday loans
Which one is better, a personal loan or a payday loan?

What are personal loans?

A personal loan is an unsecured loan that can be used for personal expenses such as home renovation, debt consolidation, or medical bills. Unlike secured loans, personal loans do not require collateral and are based on the borrower’s creditworthiness and income.

The key benefits of a personal loan include the following:

  • These loans can be used for a wide range of expenses.
  • No collateral is required to obtain personal loans quickly and without extensive documentation.
  • Personal loans generally have a fixed interest rate, making monthly payments predictable and consistent.
  • Timely repayment of personal loans can help improve a borrower’s credit score.
  • Personal loans can be processed quickly, and funds can be available within a few days.

What are payday loans?

A payday loan is a short-term loan usually due on the borrower’s next payday. These loans are typically for small amounts used for unexpected expenses or emergencies.

The key benefits of a payday loan include the following:

  • Payday loans are typically processed quickly, and funds can be available within a few hours or days.
  • Lenders usually don’t check borrowers’ credit scores, making them accessible to people with poor credit.
  • Payday loans are easy to qualify for as long as the borrower has a steady source of income.
  • Payday loans can be applied online, making the process simple and convenient.

Differences between personal and payday loans

Personal loanPayday loan
Repayment terms1 to 5 yearsDue on the borrower’s next pay cycle, or within 2 to 4 weeks
Interest ratesLower, ranging from 10% to 24%Higher, ranging from 36% to 60%
Loan amountRanges from Rs 10,000 to Rs 5,00,000Ranges from Rs 3,000 to Rs 1,50,000
Credit requirementsGenerally requires a good credit scoreTypically does not require a good credit score but may require proof of income.
Impact on creditIt can positively impact an individual’s credit if they make timely payments.It will not help improve credit score
PurposeIt can be used for various purposes, such as debt consolidation, home improvements, or medical bills.They are typically used for emergencies like car repairs or unexpected bills.
FeesThis may include processing fees, prepayment charges, and late feesMay consist of high-interest rates, rollover fees, and late fees

Which one is better, a personal loan or a payday loan?

A personal loan may be a better option if an individual needs a larger amount of money and has a good credit score. Personal loans generally offer lower interest rates, longer repayment tenures, and more flexibility in terms of repayment. However, Personal loan eligibility criteria may be stricter as they often require a credit check.

On the other hand, a payday loan may be a better option if a borrower needs a smaller amount of money and has a low credit score. These loans offer quick cash without a credit check or extensive documentation. However, they come with high-interest rates and fees and can lead to a cycle of debt if not repaid on time.

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