When you need financial help, you can apply for a quick loan! Payday loans and personal loans are two standard loan options that consumers use for unexpected expenses. But when it comes to payday loans vs. personal loans, which is better? Learn the differences between the two below.
What Is a Personal Loan?
A personal loan is an installment loan that provides eligible borrowers with a quick upfront payment. Borrowers pay off the personal loan through monthly payments for a specified duration. You can use personal loans for various expenses since loan amounts range from a hundred dollars to a few thousand.
Various financial institutions offer personal loans. You can apply for a personal loan through your bank or credit union if you have a checking account. If you prefer to save time and avoid unnecessary travel, there are online lenders that offer personal loans.
If you’re interested in getting approved for a personal loan, know that qualification depends on a credit check. Lenders will closely examine your debt-to-income ratio and credit score. Your personal loan documentation must prove your income, residence, and identity.
The monthly payments are composed of the principal balance and interest fees. You can opt for variable or fixed interest rates when you borrow money through a personal loan. Most lenders offer unsecured personal loans, but you could use collateral to get a secured personal loan.
Lenders report personal loan payments to the major credit bureaus, which can help boost your credit if you make continuous on-time payments. But your credit score can drop if you miss a payment or experience financial issues.
The Advantages of Personal Loans
Personal loans offer many benefits for eligible borrowers. Read about some of the perks below.
Flexible Repayment Length
When you borrow money through a personal loan, you can choose how much time you want for repayment. You can request a short or extended repayment length depending on your financial situation! A short repayment term means saving money on interest rates, but your monthly payments will be higher. While an extended repayment length can help you keep more money in your pocket every month with lower payments.
Decent Interest Rates
Before a you apply for a loan, paying attention to the interest rates is essential. If the interest rate is too high, your monthly payments can quickly become a financial burden. Lower interest rates can help you keep more money in your pockets. Personal loans often come with competitive rates, which can significantly benefit your finances.
Large Loan Amounts
Personal loan borrowers can apply for a small or large loan. For example, if you need $5,000 to move out of your house, you may be able to get enough money through a personal loan! Don’t need that much money? Lenders also offer small loans for just about any expense. For example, you could easily apply for a $200 personal loan for something like the cost of a new pair of glasses.
The Disadvantages of Personal Loans
Every loan option has advantages and disadvantages. Before choosing between payday loans vs. personal loans, it’s essential to know the cons to make a fully informed decision.
Eligibility Requirements
Getting approval for a personal loan depends on your income and credit score. You may have difficulty obtaining a personal loan offer if you have a bad credit history. Low credit scores can also make it hard for you to get affordable loan terms.
Possible Fees
When you inquire about a personal loan, you must ask about fees before signing a loan agreement. Some lenders have hidden fees that cost you a lot, such as application and origination fees. However, you can avoid unnecessary fees by comparing lenders and asking questions.
Taking on More Debt
Eligible borrowers can get larger loan offers with personal loans, but this can be detrimental if you borrow too much money. Taking on more debt can lead to serious financial problems. Borrowers may end up struggling to save money and keep up with other debt payments. A significant personal loan can quickly lead to a debt spiral.
What Is a Payday Loan?
A payday loan, or payday cash advance, is a quick cash loan option for consumers that need money between pay periods. Potential borrowers can apply for payday loans online or at a store location.
Payday loans are short-term loans that borrowers must repay within two weeks. Borrowers are responsible for one payment to payday lenders, which consists of the principal balance and additional fees. If eligible for a payday loan, you can get up to a few hundred dollars for unexpected expenses.
Potential borrowers typically need to have a steady income and an active bank account to be eligible for a payday loan. You can still qualify for emergency cash if you have a low credit score. Payday lenders do not consider credit for qualification, which means you could get approval despite bad credit.
Lenders do not report payday loan payments to the credit bureaus, which means your credit score will not be negatively affected by a late payment. However, your credit score will suffer if the payday lender sends your unpaid debt to collections.
The Advantages of Payday Loans
Payday loans are a convenient, fast cash option that offers consumers various benefits when they need quick emergency cash.
Easy to Apply
The approval process for payday loans is quick and efficient. Payday lenders do not require a lot of documentation, which helps speed up the approval process. There are online payday loan options, so you can quickly get approval right from the comfort of your home.
Fast Emergency Cash
If you think, “I need a payday loan immediately,” know that you can get one! Eligible borrowers could get money in their bank account within one business day. A payday loan could improve your personal finance quickly so you can pay bills on time.
Bad Credit Is Okay
A good credit score is unnecessary for approval, so you may only have to apply with one lender! You may not have to go through a credit check when you submit an application for a payday loan. Skipping a credit check can help you avoid decreasing your credit score by a few points.
The Disadvantages of Payday Loans
Although payday loans are a convenient loan option, you need to know some major cons. For example, many financial experts refer to payday loans as predatory due to deceptive lending practices.
Short Repayment Lengths
The payday loan cycle is very short, only lasting two weeks. Payday lenders expect borrowers to repay the money using their next paycheck. But life is unpredictable, and you may not be able to repay the loan on time. When you miss a payment, the payday loan renews. A payday loan renewal is known as a rollover. Rollovers incur rollover fees, making it harder for you to pay off your debt.
Low Loan Amounts
Most payday loans only provide eligible borrowers with a few hundred dollars. This amount may not be enough money to cover a financial emergency you are facing. Suppose your car needs a new catalytic converter worth $945. You may have to take out multiple payday loans, typically $500 or less.
High-Interest Rates
Payday loans tend to have extremely high-interest rates. When interest rates are sky-high, monthly payments become unaffordable, and it’s easy to fall behind on payments. Payday lenders often get stuck in a debt spiral due to the high-interest rates.
Personal Loans vs. Payday Loans: Which Is Best?
Between payday loans vs. personal loans, which is better? Now that you understand how these loans work, you can make a fully informed financial decision. The best loan option depends on how much money you need and how much time you want to repay the loan.
A personal loan is better if you need a lot of money to pay bills and expenses. You can get up to a few thousand dollars with a personal loan, which makes it perfect for high-cost expenses. On the other hand, you may only get up to a few hundred dollars with a payday loan.
Borrowers pay off personal loans over a few months or years. Borrowers can choose how much of a financial commitment they want to make when they apply for personal loans. However, payday loans need to be repaid within two weeks or face late fees.
Loans are a great financial tool when you need quick emergency cash. Every loan option has pros and cons. The best loan depends on your unique financial situation and repayment preferences. However, personal loans are usually the better option!
References:
A payday loan vs personal loans