The difference between payday loans and personal loans

So you need cash in a hurry, and you know you can get it by signing up for a loan. But which kind of loan? A personal loan or a payday loan?

Well, let’s look at the difference between the two.

the difference between a payday loan and personal loan

Personal Loans

Apply for a personal loanA personal loan offers you the opportunity to borrow money (usually from a bank) with a certain interest rate (based on your risk profile) for a certain duration of time. Personal loan periods are usually measured in years, such as a two year loan for instance. The interest will make up a fairly small amount of the loan.

When applying for a personal loan, the institution will look at your credit rating, your expenses and income, do a credit check and then decide whether you can afford to pay back the loan in the course of the loan term. Should you be unable to pay back the loan in the given time, you can re-negotiate with the bank for an extension, with the understanding that you will continue paying interest.

Payday Loans

apply for a payday loanA payday loan is slightly different. Firstly it is a short term loan of one month – the equivalent of one pay cheque cycle. When you approach a lending organisation, they will do a quick credit check on you, and then decide whether you can have the cash or not. Once they’ve done the check and found you credible, they will give you the cash immediately. The process is quicker than with a personal loan, but you will pay much more interest.

For instance, you could borrow R5 000 for a month, and pay R500 interest. You pay a higher price for the speed and convenience of the loan. Plus, if you pay back in time, you will more easily qualify for another loan of this kind, should you need one.

With a payday loan, when the end of the month comes round, you need to pay the loan in full, or you will be highly penalised – in other words, you will have to pay a big sum of money.

So your variables (which will help you decide which loan to take up) are time (how quickly you need the money, how long it will take to pay back the loan), interest (high or low) and your credit worthiness (the criteria for a personal loan is usually stricter than that of a payday loan).

The decision is yours

In the end, you need to make the decision that suits your own unique needs best.

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