A personal loan is a loan that is given for funding one’s personal requirements. A personal loan is usually repaid in fixed installments within a fixed period. It is generally given to finance one’s current financial needs.
A payday loan is a loan comprising a small amount given at a high interest rate. In this loan agreement, you will have to repay the loan right after you get your salary. The loan will have to be repaid on your payday. It is unsecured in nature.
A personal loan is typically given after the lender checks the creditworthiness of the applicant. You can get a personal loan only with a good credit score. On the other hand, a payday loan is given even if the applicant has a bad credit score.
Comparison between personal loans and payday loans
Let us discuss the various differences between personal loans and payday loans:
- Personal loans are not very expensive. If you have a good credit score, a personal loan is the best option for borrowing as it is cost-efficient. Payday loans are slightly expensive. You will have to pay a pretty high interest amount for such a loan.
- When you take a personal loan, you can pay it within a longer period. You can choose a long payment period and repay it in smaller installments. This way, your monthly expenses will be minimised as the repayment amount for each month is less. If you take a payday loan, you will be required to pay it when you receive your next paycheck. A payday loan is typically given for a short period and has to be paid back within a month.
- A payday loan is usually paid back with a post-dated cheque. On the other hand, a personal loan is paid with a check on a monthly basis or it is withdrawn.
- Payday loans are processed very quickly as opposed to personal loans. The documentation process for payday loans is much simpler and faster.
- The annual percentage rate of interest on a payday loan is typically higher than the annual percentage rate charged on a personal loan.
Benefits of personal loans
Personal loans are provided without any collateral to secure the loan. Take a look at some of the benefits of personal loans:
- The payments are anticipated: Personal loans are given at fixed interest rates or variable interest rates. When you take a personal loan at a fixed interest rate, you will be aware of how much you should repay every month. You will be required to pay the same amount throughout the full loan tenure.
- Higher loan amounts: When you choose a personal loan, you will get higher loan amounts. According to your income and credit score, you can enjoy higher loan amounts.
- Longer tenure: You can make your loan repayment over a longer tenure. Therefore, you will be able to make repayments every month.
- Savings on loan costs: When you choose a personal loan, you can enjoy great savings on loan costs and loan interest rates.
- Easy to get: Your personal loan application will get approved in a reasonably short period and your funds will get credited into your bank account directly. You can also take it in cash.
Limitations of personal loans
Here are some of the limitations of personal loans:
- Late payment charges: You will be required to pay late payment penalties when you miss any repayment deadline.
- Provision of collateral: You may be asked to provide a collateral to your lender in certain circumstances. For example, when you have a low income or a pretty bad credit score or when you are unemployed for a specific period. You will have to give an asset as a security in this arrangement. When you stop making payments, your asset will be seized by your lender.
Benefits of payday loans
Let us now discuss the advantages of payday loans:
- Easy to get: You can get a payday loan without any hassle. If you earn a regular income, you can get a payday loan very easily. You will have to show relevant documents as proof of income to get your loan approved.
- Great alternative option for borrowing: When you fail to meet any requirement for procuring a personal loan, you can go for a payday loan. You will get this loan quickly as lenders are not very strict when they have to provide a payday loan.
- Available at many places: There are many payday loan agencies in Singapore. You can get a payday loan either by visiting a payday loan agency or by buying online. It is easily available in several places.
- Instant funds: You will get funds immediately after you apply for a payday loan. You will receive the funds in cash or your account will be credited with the money.
Limitations of payday loans
Let us take a look at a few of the disadvantages of payday loans:
- Expensive loans: Payday loans are slightly expensive. You will be required to repay your loan at very high interest rates. However, many borrowers do not mind paying so much for a payday loan as it is very quick and easily accessible.
- Recurring debt: Every month when you receive your salary, you will have to repay your payback loan. It can get recurring. Each time you earn money for a new month, you will have to pay back the dues of the previous month. This can have a bad impact on your finances.
If you ever come across a situation where you may have to choose between a personal loan and a payday loan, you can follow these guidelines to make your decision:
- Determine your loan amount: You can determine how much you need to borrow and then choose between the 2 loans. If you need a very high amount, you can go for a personal loan as you will need more to time to repay it. If you need a small amount for an emergency, you can select a payday loan.
- Determine your loan tenure: If you need for a longer loan period in order to repay your amount slowly, you should choose a personal loan. If you are sure you can repay your loan in a short period, you can select a payday loan.
- Check your credit score: If your credit score is good, you can choose a personal loan. If you have a credit score that is not so good, you may have to select a payday loan.
- Impact on credit score: When you do not repay your personal loan on time, your credit rating will get affected negatively. If you pay it on time, your credit score will get enhanced extensively. When you fail to repay a payday loan, your credit score will not get affected.
You can keep these points in mind and determine what type of loan you want. You can analyse the benefits and limitations of the loan products that have been offered to you and then make a proper decision.