What Are Payday Loans? Difference Between Payday and Personal Loan

Last Updated: 14 Oct 2024

A loan presents an excellent solution for funding both major and minor expenses. In earlier times, borrowers had limited choices, mainly high-interest credit options offered by financial institutions or credit unions. However, with a growing comprehension of financial matters, there has been an increasing demand for affordable loans catering to immediate needs.

Consequently, new loan options, including Payday Loans Vs Personal Loan, emerged to address the unexpected demands of borrowers. These loans differ based on various factors, such as the interest rate, loan duration, and other essential aspects that set them apart from each other.

What is a Payday Loan?

Payday loans are incredibly short-term loans that come with a relatively higher interest rate. Their primary purpose is to assist you in covering your expenses until your next payday, which is why they are called payday loans. Typically, these loans are for small amounts and have a tenure of less than a month.

Unlike traditional loans with EMIs, payday loans are so small that you can repay the entire amount in one payment. They are versatile and can be used for various purposes, such as paying monthly rent, utility bills (like electricity or internet), and more. The total loan amount is usually lower than your monthly salary.

In India, online payday loans are unsecured, meaning you don’t need to provide any collateral to obtain the loan. While this leads to a higher interest rate, it also simplifies the process of getting a loan. These loans can be acquired quickly, often within a couple of days of applying, requiring minimal documentation. Typically, providing your KYC details and monthly financial statements is sufficient for the loan application.

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Difference Between Payday Loans and Personal Loans

When it comes to covering emergency expenses, difference between payday and personal loans play a major role:

spect	Payday Loans	Personal Loans
Definition	Short-term loans typically due on payday	Borrowed sum repaid in fixed instalments
Borrower Requirements	Proof of income and a bank account	Credit check, income verification, collateral (in some cases)
Loan Amount	Usually, smaller amounts	Variable, typically larger sums
Interest Rate	Very high APR, often exceeding 400%	Lower APR, depends on creditworthiness
Repayment Schedule	Lump sum payment on next payday	Fixed monthly instalments
Term	Usually, 2 weeks to a month	Several months to several years
Approval Speed	Quick approval process	May take longer for processing and approval
Credit Check	Often no credit check required	Credit check is typically required
Collateral	Generally, no collateral needed	Some personal loans may require collateral
Risk of Debt Cycle	High risk of trapping in a cycle of debt	Lower risk due to structured repayment plan
Accessibility	Easier to obtain, especially for bad credit	May be more challenging with poor credit

Similarities Between Payday Loans vs. Personal Loans

Although Payday Loans Vs Personal Loan are fundamentally different methods of borrowing money, they share certain similarities. Both options offer swift and adaptable ways to access the funds you require. Additionally, they can be refinanced to secure improved terms for the loan.

Fast

Both payday loans and personal loans provide quick access to funds. Payday loans allow you to visit a lender and receive the needed money within an hour. Similarly, personal loans, especially those offered by online lenders, can also disburse funds promptly, sometimes within 24 hours.

Flexible

Unlike certain types of loans like auto loans, student loans, or mortgages, which are restricted to specific purposes, payday loans and personal loans offer the flexibility to utilize the funds for almost any expenses you choose.

Refinancing

Refinancing involves obtaining a new loan to settle existing debt, and it can be applied to both payday loans and personal loans if you have a favourable credit history and a track record of timely payments on your current loan.

You can seek refinancing through a payday lender for payday loans, but this approach may result in owing more than your original debt due to their high-interest rates. On the other hand, banks, credit unions, and online lenders typically offer more favourable terms for refinancing using a personal loan, making it a better option to consider.

Is a Personal Loan a Better Alternative to a Payday Loan?

In general, personal loans tend to be more cost-effective compared to payday loans. These lower-cost personal loans provide borrowers with a longer repayment period, offering more time to pay off the loan compared to the short-term nature of payday loans. Additionally, many credit unions offer personal loans with Annual Percentage Rates (APRs) that are comparable to credit card rates, which are still significantly lower than the exorbitant rates charged by payday loans.

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The Bottom Line

When faced with an emergency requiring immediate funds, opting for personal loans is undoubtedly a superior choice compared to payday loans. While payday loans might appear convenient at first glance, they often lead to higher long-term costs. Applying for a personal loan today will help you explore suitable options. For sound financial decisions, consulting a financial advisor is highly recommended.