Everyone has had times when they needed a little loan to get them by for a short while. Perhaps we overspent on our credit card and are unable to pay the bill, or perhaps we have an unexpected expense that wasn’t planned for. Instead of asking friends or relatives for money, taking out a small loan can be the best course of action in this situation.
But what kind of loan should you opt for? Should you apply for a payday loan or a Personal Loan? Even though they sound the same, there are several differences between the two. You need to know these differences to make an informed decision.
In this article, we’ll tell you all about Personal Loans and payday loans along with the differences between the two.
What is a Payday Loan?
Payday loans are ultra short-term loans that attract a relatively high-interest rate. Essentially, the purpose of a payday loan is to help you meet your expenses until you receive your next salary on your payday (hence the name payday loan). A payday loan can be availed for small amounts and the tenure of such a loan is less than one month.
Rather than paying EMIs on a loan, a payday loan is usually so small that you can repay the loan in a single shot. A payday loan can be used for any purpose such as helping you pay your monthly rent, utility bills like electricity or internet, and so on. Essentially, the total amount of a payday loan will be lower than your monthly salary.
A payday loan online in India is an unsecured loan. You do not have to provide any collateral in exchange for the loan. Even though this makes the interest rate relatively higher, it also means that it is relatively much simpler to avail of such a loan.
A payday loan can be availed very quickly (within a couple of days of applying for the loan) and they require minimal documentation. Usually, you only need to provide your KYC details and your monthly financial statements.
What is a Personal Loan?
A Personal Loan allows you to borrow a high loan amount that you can pay back over months or even years. Usually, a Personal Loan can be availed for a maximum amount of ?30 Lakh and you can repay the loan over five years. The interest rate for a Personal Loan is usually around 10% per annum (which is lower than that of a payday loan).
A Personal Loan application can be made for any purpose such as paying for a vacation, meeting emergency medical expenses, paying for a wedding, and so on. Further, you don’t have to provide any collateral for availing of a Personal Loan.
Usually, a lender will decide whether you’re eligible for a Personal Loan by considering your financial statements and your credit score. If you meet both requirements, then you have a high chance of receiving a Personal Loan.
You can repay the Personal Loan through small monthly installments known as EMIs. The monthly EMI will include all the costs associated with taking out the loan including the interest rate and the processing fee. Essentially, a Personal Loan is used by people who need to meet a high unplanned expenditure. A Personal Loan can help you meet sudden expenses without having to sell your assets.
Differences Between a Payday Loan and a Personal Loan
There are a few key differences between a payday loan and a Personal Loan that you should know about
A payday loan offers small loan amounts that are less than your monthly paycheck. The tenure of the loan is also extremely short and you’re expected to repay the entire loan amount when you get your next monthly paycheck. In contrast, a Personal Loan can be availed for a relatively higher amount and much longer tenures.
While considering your application for a payday loan, a lender will ask you to guarantee your next paycheck. This means that the lender can legally use your next paycheck to reimburse their loan along with interest in case you fail to repay the loan on your own. In contrast, when you consider your application for a Personal Loan, a lender will check your credit score and a steady source of income.
The interest rate on a payday loan can be quite high in comparison to the interest rate of a Personal Loan. Further, if you fail to repay a payday loan within one month, you will need to pay a penalty in the form of rollover fees.
Should You opt for a Payday Loan or a Personal Loan?
Payday loans and Personal Loans are meant for different purposes (even though both types of loans can be used for any purpose unlike a car loan which requires that you purchase a car from the proceeds of the loan or an education loan which can only be spent on educational expenses).
A payday loan online in India is meant to help you meet very small expenditures such as an emergency car repair or paying your monthly electricity bill. The amount of a payday loan will always be less than your monthly salary because you will need to repay the entire loan along with interest on your next payday or within a month.
In contrast, a Personal Loan application can be made for relatively higher loan amounts and have longer repayment tenures. A Personal Loan can be used to pay for relatively larger expenses such as a wedding or a hospitalization or a foreign vacation.
Hence, the decision to avail of a payday loan or a Personal Loan depends on what you need the money for.
Wrapping Up
Both payday loans and Personal Loans can be highly useful. The decision to opt for one or the other depends on your financial requirements. You can apply for a payday loan online in India or you can make a Personal Loan application to your favorite lender anytime.
