Many of the people think that payday loans and personal loans are one of the same things, or that they are at least very similar. But there are however some big differences between the two.
Payday loans are generally for a very short term and they are secured against the borrower’s next paycheck. Payday lenders are however usually very eager to offer this “band-aid” solution in times of financial crisis, which however comes along with their sky-high interest rates that are generally through the roof.
Personal loans are commonly for the larger dollar amounts, which thus mean that they actually offer a solution to many of the borrower’s immediate financial problems, and are then paid back in the form of installments over a longer period of time.
However, aside from these main differences that are between payday loans and personal loans, the article below provides for many others which helps to set the two options apart.
Loan Processing Period
- Payday loans are thus typically processed quickly, while most of the personal loans may require several days or even a couple of weeks for processing.
- Because payday loans are often approved within minutes and the loans are disbursed the next business day, they thus may seem to have the upper hand for the borrowers who are facing an urgent situation.
- The repayment period of personal loans has the repayment periods which ranges from several months to a year or even two years.
- By contrast, the repayment period for the payday loans can either be as short as one week, although many of the payday loans have repayment periods which lasts closer to two weeks.
- Payday loans also typically allow borrowers who cannot repay their loans in full to renew their loans at the end of each pay period however by making a token payment that only covers a portion of the interest on the loan.
- Such renewals also extend to the loan so that a two-week loan can thus end up taking several months or more than a year to be repaid in full.
Interest Rates and APR
- Cash advances from the credit cards always carry high-interest rates, but not nearly as high as the interest rates and the annual percentage rate (APR) which the payday loans carry.
- The average payday loan APR is 339% according to the CFPB, and they thus often exceed 1000%.
- Check credit score for Personal loans always require stringent credit checks, although some of the lenders also consider other factors in addition to the information which they receive from the credit checks.
- On the other hand payday lenders mostly do not perform a conventional credit check. Instead, the borrowers are either approved or either denied for the most part, and this is based on whether or not they have verified income.
Collateral or Co-Signer Required
- Personal loans typically do not make any request for collateral, although some of the banks and credit unions may, however, require the borrowers with poor credit to obtain a credit-worthy co-signer.
- Payday loans also do not require co-signers, although some of the payday lenders may require borrowers to list the references along with their employment and the bank information.
- Title lenders are also a type of payday lender that provides loans in exchange for the title of either the borrower’s house or car.
- The borrower is still also allowed to keep their house or car, but the lender thus keeps the title until the loan is paid in full.
The Final Tally
- Payday loans always have two major advantages over the other types of loans
- Processing of the speed, and
- The relaxed underwriting standards.
- However, they also carry serious disadvantages that more than they make up for
- The convenience of obtaining the money quickly with no credit check.
- In fact, the payday loans are often little more than the financial traps. However, destroy a borrower’s credit for months, if not years.