People can borrow different loans from financial lenders. However, do they weigh the differences and similarities between the loans they take out? Various debts come with different interest rates, payment duration, and amounts.
One of the most confusing loan categories among borrowers is payday loans and personal loans. The two loan types have similarities, yet they differ in some ways.
Here are the similarities and the difference between the two to enlighten anyone;
Similarities
The two loan types are similar in a few ways, including;
Their use
Usually, the two loan types are easy to access from lenders. Therefore, most people borrow them in times of emergency or to meet some of their unexpected bills. However, one can also use them to cover any other need.
Their nature
Like any other loan, a person has to repay their personal or payday loan. Besides, both debts come with interest that one must pay until the loan term ends.
Differences
Payday loans and personal loans differ significantly. Here are their main differences;
Interest rates
A payday loan has a very high interest rate and fee. Lenders charge high rates because people who seek this loan type have poor credit scores and are thus risky to lend. Their APR can be as high as 400%, making them unfavorable for borrowers.
On the other hand, personal loans’ interest rates and fees are lower and fair. Besides, if the borrower has strong credit, they can get a loan with a single-digit interest rate.
Loan amount
With a payday loan, a person can only borrow a small amount of up to $500 just for shopping or car repairs. Lenders don’t want to risk massive amounts with people who have a bad credit history.
However, for a personal loan, the case is different. One can borrow as much as $100,000 or more. Usually, the borrower’s credit score determines how much they qualify for. Therefore, if one has a good score, probably more than 700, they can get a substantial personal loan to finance their projects.
Loan duration
When a person takes a payday loan, the lender expects them to pay it back within a short period, mostly when they get their next paycheck. Failure to repay can result in an increased interest rate, thus making this loan type more dangerous. In some cases, the lender automatically withdraws their money from the borrower’s account if they have their bank details.
In contrast, personal loans have a more extended payment period. Depending on the lender, a person can get a loan term of two years or even five years. As a result, they can schedule to repay it in weekly or monthly installments to ease the burden.
Credit checks
Payday loan providers don’t check on the borrower’s credit history. A person only needs to have a permanent job to qualify for the loan. Usually, their salary determines the amount they can borrow.
However, lenders do thorough credit checks for personal credits before approving them. They will check if a person has other existing loans, how they repay them and how they pay their utility bills. As a result, the report determines how much a person can borrow.
Impact on credit score
Lenders providing $255 payday loans online do not give their reports to credit bureaus. They deal with their clients one on one. Therefore, a person’s payday loan history is not recorded in their credit report.
On the other hand, when a person takes out a personal loan, it reflects on their credit history report. Besides, their repayment behavior also affects their score. If one pays on time, their score builds up, but the score goes down when one delays.
Approval period
When one borrows a payday loan, it takes a short time to be approved. One can get the money within 24 hours because lenders don’t have much to check from the borrower.
However, the approval time for personal loans is longer, probably a few days. This is because lenders have to do a thorough background check about the borrower. They have to check on their credit history, among other things. However, some lenders may approve the loan within hours.
Security
Lenders do not need any collateral for a payday. They only check on the borrower’s salary.
Contrary, personal loans can be secured or unsecured. The borrower has to provide collateral for the secured loan, such as their home or car. Mostly, lenders will ask people with bad to provide security for their loans. However, one can qualify for an unsecured personal loan if you have good credit.
Conclusion
Payday loans and personal loans are some of the loans one can access easily to sort out emergencies or any need they have. Even though people confuse the two, they have remarkable differences. For example, a personal loan helps borrowers build their credit if they repay it on time, while a payday loan has no impact on their credit. Therefore, it is vital to understand the differences before choosing which loan to go for from any lender.
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