Payday Loan vs Personal Loan: Which is Better for You?
A loan can be an excellent way to cover small and large expenses. Earlier, loan seekers were stuck with a limited selection of loan products from credit unions and financial institutions. However, with increasing people’s awareness about financial matters, the demand for loans has seen a boost. As a result, lending institutions design various credit options to suit everyone’s needs. Personal Loans and payday loans are the most popular funding options available these days. While both have pros and cons, let’s explore payday loans vs. Personal Loans to understand which better suits your financial requirements and repayment capability.
What is a Personal Loan?
A personal loan is an unsecured loan which can be used in various ways such as for covering medical bills, repairing the house or even for going on a trip. Personal loans, unlike other types of loans, have no conditions regarding the purpose of the borrowed money.
- Repayment Terms: In terms of personal loans, repayment periods are very flexible and range from 12 to 36 months.
- Loan Amounts: The amount that the borrower gets is decided upon the income, credit score, and capacity to make repayments.
- Interest Rates: Personal loans mostly carry lower interest rates than payday loans especially when your credit history is good.
- Eligibility Criteria: Lenders assess your eligibility for personal loans by assessing a credit score, income and debt-to-income ratio.
What is Payday Loan?
A Payday Loan is a short-term unsecured loan which provides funds to assist with immediate expenses until your next paycheque arrives. Payday loans are usually for smaller amounts of money repaid in two - four weeks.
- Repayment Terms: The repayment for payday loans is paid off in one lump sum when your paycheque arrives.
- Loan Amounts: Payday loans are largely based on your monthly salary. You can expect a payday loan to be an amount between a few thousand rupees, usually up to a portion of your salary as per lender.
- Interest Rates: As payday loans are short-term loans with a higher risk for the lender, on average the interest rate for these loans will be more expensive than the average personal loan.
- Eligibility Criteria: These loans are easier to qualify for, therefore usually require little documentation and lenders typically use digital risk assessments; formal credit checks may be limited.
Key Differences Between Payday Loans vs Personal Loans
After understanding the fundamental meaning of both loans, let’s look at the payday loans vs. Personal Loans. Understanding the distinction between them will help you make a better financial decision:
| Parameter | Personal Loans | Payday Loans |
|---|---|---|
| Target Borrowers | Almost everyone, whether salaried employees, self-employed professionals | Better funding options for salaried employees with financial crunch between paydays |
| Primary Objective | To manage financial needs involving considerable cash arrangement | To pay for urgent short-term expenses arising between two subsequent paydays |
| Interest Rate | Vary for each borrower depending on the credit score, loan amount, repayment term, repayment capacity, income, DTI ratio, work experience, etc. | Higher interest rates than Personal Loans |
| Sanction Size | Higher loan amounts to cover big-ticket expenses like home renovations, vacations, higher education, medical emergencies, etc. | Smaller loan amounts to cover short-term expenses like utility bills, education fees, moving costs, etc. |
| Repayment Tenure | Medium repayment tenure up to 60 months | Shorter repayment tenure from 15 to 30 days |
| Hidden Charges | Transparent procedure with no hidden charges | Hidden charges might be involved due to hurried application and approval |
| Availability | Most reputable lending institutions, including Hero FinCorp, offer Personal Loans through branch offices, websites, or loan apps. | Only a select few loan companies offer payday loans in India. |
| Eligibility Criteria | A stringent set of eligibility criteria involving your age, income, work experience, employment, occupation, etc. | Flexible eligibility conditions based on your income, identification, and bank account |
| Credit Score Requirement | Lending companies expect a decent credit score to determine your creditworthiness. | Loan providers approve payday loans primarily based on your salary. |
Read Also: What Are the Alternatives to A Payday?
Interest Rate for Payday and Personal Loan
When looking at the payday loan comparison with Personal Loans, you will find that interest rates of payday loans are significantly higher than that of online personal loans. While Personal Loan interest rates depend on your credit profile, employment, work experience, income, etc., payday loan interest rates are higher due to their urgent service and the bigger risk they take in lending you.
When to Choose a Payday Loan?
While payday loans are often considered an easy solution for a financial crisis, the downsides are severe. Below are some ideal situations when a payday loan could be acceptable:
- Of Immediate Need: You are just a few days away from your paycheck, but you have an immediate need for funds.
- Small loan amount: You have a need for a small loan i.e. under Rs 30,000 and are reasonably certain you will be able to repay it back in the short period.
- Poor Credit: You have bad credit so you cannot qualify for a personal loan.
Things to Consider Before Taking Out a Payday Loan:
- High-interest rates: Be prepared for higher charges.
- Short repayment term: Make sure you will be able to pay back the entire amount by your next payday to avoid additional fees.
When to Choose a Personal Loan?
Personal loans are a more affordable and structured borrowing option for big or planned expenses. Below are some cases where a personal loan can be a better option:
- Larger Expenses: If you need funds for events such as a wedding, education, or house remodeling.
- Better Repayment Flexibility: If you like to have longer repayment periods with lower, more manageable monthly installments.
- Increasing Credit: Regular repayment of loan will positively affect your credit score.
Points to Consider Before Opting for a Personal Loan:
- Eligibility Criteria: You need to meet the lender’s credit score and income requirements.
- Time and Documentation: The approval process takes longer than payday loans, and more paperwork is involved in personal loans.
Payday Loan vs Personal Loan: Which is Right for You?
The choice between a payday loan and a personal loan is based on your financial condition and objectives. This is a summary that will assist you in making a decision:
- Use a payday loan: if you require money urgently and just for a short time. However, be sure that you will be able to pay it back before the next payday to avoid a debt trap.
- Take a personal loan: if you want a bigger amount, have a longer repayment period, and lower interest rates.
Conclusion
Personal Loans and payday loans are designed to fulfil different requirements. The loan amounts, interest rates, repayment terms, etc., differ. While both have pros and cons, you must settle for one that best suits your funding requirements. After understanding payday loans vs. Personal Loans, you can make your borrowing decision with more conviction. Use the Hero FinCorp Personal Loan app to apply online and get the required funding instantly.
Frequently Asked Questions
1. Is a payday loan secured or unsecured?
Payday loans are unsecured, which you can obtain without collateral, security, or guarantor. Personal Loans are also unsecured.
2. What is meant by a payday loan?
A payday loan is a short-term funding option you can borrow to fulfil your requirements before your next paycheque arrives.
3. What is another name for a payday loan?
A payday loan is also known as a cash advance, which means it is like an advance cash you borrow before your salary gets credited into your account.
4. Is a payday loan revolving or an instalment?
A payday loan is neither a revolving loan nor an instalment. You must repay it in lumpsum after your upcoming payday. It is not revolving, as it is not an open-ended credit line.
5. What is the difference between an instalment loan?
An instalment loan, such as a Personal Loan, is a loan you must repay in EMIs. However, when you borrow a payday loan, you must repay the entire borrowed amount in lumpsum after your paycheque arrives.
6.How does a payday loan compare to a personal loan in terms of interest rates?
Payday loans have extremely high interest rates compared to personal loans, making them expensive and risky for borrowers.
7.What are the risks involved in payday loan vs personal loan?
Payday loans can put borrowers at risk of getting stuck in cycles of debt. On the contrary, personal loans give people comparatively lower interest rates and more time to pay back the loan amount.
8.When should you choose a payday loan over a personal loan?
Choose a payday loan when you are in short-term cash needs and don’t have any other borrowing options available.
About Hero Fincorp
Hero Fincorp offers a wide range of financial products including Personal Loans for personal needs, Business Loans to support business growth, Used Car Loans for purchasing pre-owned vehicles, Two-Wheeler Loans for bike financing, and Loan Against Property for leveraging real estate assets. We provide tailored solutions with quick processing, minimal paperwork, and flexible repayment options for smooth and convenient borrowing experience.
