Payday Loan vs Personal Loan- Key Differences Explained

We often meet scenarios in life in which we require quick funds to manage urgent expenses like travel, wedding, medical bills, or others. These expenses are affordable, but you don’t have liquid cash at that moment. Thus, you can reach out to financial institutions for short-term unsecured loans like Personal Loans and Payday loans to meet these needs.

But, to decide which loan option is the right choice for you is also a difficult choice. Knowing the differences between Payday Loans and Personal Loans will help you make an informed decision.

What are Personal Loans?

There is no specific purpose of a personal loan, like an education or home loan. The funds can be used for any personal expense and repaid with interest over time. You can use money for weddings, travel, medical bills, house renovation, and other expenses.

Banks and other financial institutions decide your personal loan eligibility based on your credit score, income, and loan repayment track record.

What are Payday Loans?

These loans are short-term, unsecured, and incur very high interest rates. You will get a payday loan based on your monthly income. Suppose you are earning Rs. 40,000 per month, then the bank will offer you a payday loan of Rs. 25,000 or 62.5% of your monthly income. You must repay the loan with interest as soon as you receive the salary. In comparison to a personal loan, the repayment time is extremely shorter, generally less than 30 days.

Differences between Personal Loans and Payday Loans:

Loan Amount and Term:

The major difference between personal loans and payday loans is the offered loan amount and term in both financial instruments.

In a personal loan, the borrower gets a broader spectrum of loan amount than a payday loan, lying anywhere between 50,000 to Rs. 5,00,000, though this will vary between lenders. The loan amount is usually paid back over a longer period of time, generally 1-5 years.

On the other side, you get a short borrowing amount in a payday loan, mostly lying upto 62.5% of your salary, and it should be repaid in a very short period, from 16 days to 1 year.

Purpose of Loan:

Personal loan – this kind of loan is used for planned expenses or life events. People use them to turn their dreams into reality, and it can be about weddings, home improvements, vacations, or even expenses related to their health.

A payday loan is aimed at covering short-term needs or emergencies. Even though it works well in the short term, the drawbacks of payday loans can do more harm than good to your finances if you cannot afford to repay them.

Turnaround times:

Since many lending firms now operate via mobile apps like ours, you can anticipate receiving communication regarding your loan application within a day or two. After signing the agreement on your part, you can wait a few minutes or at most a few hours until your money is deposited into your bank account.

Payday lenders specialise in speedy lending services, hence marketing their services as fast cash when in an emergency situation. You can therefore anticipate your money landing in your bank account within the hour.

Fees and Interest Rates:

In a personal loan, the interest rate depends on a lot of factors such as your credit history, employment stability, income, and others. A personal loan also includes fees, such as establishment fees and monthly account-keeping fees.

On the other hand, the interest rate on a payday loan is extremely high, going up to 40%. Thus, payday loans are preferred only in case of critical emergencies.

Personal Loan vs Payday Loan: Which is Better?

The selection of a loan type will depend on your financial needs and circumstances.

A personal loan is preferable when:

You need a large amount for big expenses
Want a longer repayment tenure
Require a low and fixed interest rate
Improve your credit history

Go for a payday loan only when:

You have a short-term cash crisis
You are sure that you can repay within a week or two
You don’t have a good credit history

Key Takeaways:

Both payday loans and personal loans have their importance in the financial ecosystem. Payday loans are a good option for urgent and short-term needs; however, comes at an extremely high cost. Personal loans, however, serve as a more secure alternative at lower interest rates.

Before making a choice, consider your financial needs, repayment ability, and long-term plans. At Rupee112, we provide you with personal loans at extremely affordable rates and high convenience.