What Makes Payday Loans Different from Personal Loans?
Payday loans and personal loans may seem identical, but they're actually different. Payday loans work on a much shorter time frame and are generally due on your next payday. On the other hand, a personal loan typically has repayment terms of two to five years.
Many other features differentiate these two types of loans. If you're considering one or the other, make sure you understand and compare their unique features before deciding which is right for you.
Read on to learn how payday loans are different from personal loans before you make a final decision:
Loan Processing Time
While payday loans get processed usually on the same day or the day after requesting, a personal loan can take up to two weeks to get fully processed and approved.
The main reason why payday loans are popular is that the funds are usually released immediately. This can be highly beneficial for people with an emergency financial situation at hand, such as their electricity being turned off due to missing a bill payment.
The payday loan business is governed by state laws that impose restrictions on both the amount that can be borrowed by a customer and the interest rate to be charged. The laws regulating payday lending vary by state, keeping in mind the interest of the consumers.
Interest rates for personal loans are lower as compared to payday loans. However, your credit score is a critical factor in determining your interest rate. If it's on a lower side, you might be offered a high-interest rate.
Personal loans allow you a loan repayment period of anywhere from several months to a few years. On the other hand, the repayment duration for payday loans is much shorter and maybe around two weeks, depending on many factors.
Sometimes borrowers can't pay back their loans in full at the end of the pay period. In these cases, payday lenders usually allow them to make a single payment, covering part of the amount owed. Studies have reported that an average payday loan borrower takes around 5 months to pay off the loan in full.
Another difference between both of these loans is that payday loans typically don’t require a credit check. Therefore, payday loans can be accessed by almost anyone, even those who have abysmal credit or no credit at all.
Moreover, payday lenders are not required to report any information back to credit bureaus about the loan you get from them. Personal loans, however, require credit checks, and not everyone is approved of them.
Usually, most people are not required to submit any collateral to receive a personal loan. However, when it comes to borrowers with bad credit scores, some financial institutions like banks may ask them to furnish details of a co-signer with good credit history for considering their loan application.
The co-signer would be accountable for repaying the left-over balance of the loan in full if the borrower can't do so for any reason. Payday loan lenders do not require co-signers, though some of them may require borrowers to provide them with references as well as employment and bank details.
Which One Is Right for You?
When deciding whether to request a personal or payday loan, you must consider the differences given above. Depending on how quickly you need the money and how much you need, you can choose either of the options. It is also necessary to understand that payday loans generally come with a higher interest rate, but they can be a good alternative for those with a poor credit score.
Benefits of Payday Loans
A few advantages of payday loans include:
- Quicker processing time
- Instant fund transfers into your account
- No credit check is required
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