There’s no denying the fact that financial emergencies often come with a lot of stress. Whether it’s an unexpected medical expense or a car repair expense, you have to deal with it without any delay. Also, if it happens sometime around the middle of the month, you know it will be long before you get your next paycheck. In such situations, a personal loan or a payday loan seem like the best solutions for your situation. Now, both payday and personal loans may look alike, but that’s hardly the case. These loans are meant for completely different purposes. That’s why, it’s important that you understand the two loans, so you can make the right choice when an emergency strikes.
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Things You Need to Know About Payday Loans
A payday loan is a short-term loan, designed to help you deal with your mid-month cash crunch. Such loans are meant to be used for emergencies that can’t wait till you get your next paycheck. Unlike typical loans, payday loans are to be repaid as soon as you get your next salary. In simple words, it’s like drawing your salary a bit early in return for interest charges.
Pros of Payday Loans:
- Quick approval and cash disbursal: Most registered moneylenders offer to approve and disburse your payday loan within hours of your application.
- No collateral required: These are unsecured loans, so you don’t have to pledge any asset as a collateral.
- Minimum documentation: Such loans require minimum documentation. All you will need is a proof of your income and your identity.
Cons of Payday Loans:
- High interest rates: These loans are quite expensive when compared to the other types of loans. Even as the Singapore government has capped the interest charges at 4% per month, these loans are still way more expensive than typical personal loans or credit cards.
Things You Need to Know About Personal Loans
Personal loans are also unsecured loans and don’t require any collateral. However, unlike payday loans, personal loans have a fixed rate of interest and a fixed repayment period. These rates may vary from person to person, depending on their income, age, job type, and credit history.
Pros of Personal Loans:
- Low interest rates: When compared to the payday loans, or even to the credit cards, personal loans are much cheaper in terms of interest rates. In Singapore, the rate of interest on these loans start from about 4.5% p.a. and goes up to 20% p.a.
- Quick approval: Most lenders in Singapore promise to approve your loan the same day, if you submit all the required documents with the application form.
Cons of Personal Loans:
- Time gap between loan approval and disbursal: Even if a lender approves your loan the same day, the disbursal of funds usually takes about a week or two.
- Minimum income requirement: Most personal loans in Singapore require minimum annual income of S$20,000.
Personal Loan or Payday Loan: What to Choose?
There are a few things that you will need to consider to choose the best option for your funding needs:
- Annual income: If your annual income is less than S$20,000, you might not be eligible for a personal loan. In that case, you can go for a payday loan. However, make sure that you are not borrowing more than you can repay with your next paycheck.
- Loan amount required: If the amount you need is not big, or if it’s just a few hundred dollars, you can go for a payday loan. However, if you need a bigger amount, a personal loan could be a better option for you.
- Repayment period: If you are looking for short-term funds, for a few days or a couple of weeks, you could consider a payday loan. However, if you are looking to borrow for about a year or more, consider a personal loan to save on your interest charges.
- How quickly you need the funds: Registered moneylenders in Singapore promise to approve and disburse your loan the same day. On the other hand, disbursal of a personal loan generally takes about a week or two.
Making the Right Decision is Important Whatever the emergency, big or small, it’s important that you choose the right type of loan. For instance, if you take a payday loan at 4% per month interest, you can’t imagine how quickly it will start adding up if you fail to repay the amount by the due date. Also, it can cause serious damage to your credit score. So, before you make a decision, consider all the pros and cons of both the loans.