How are Personal Loans Different from Payday Loans?

Many people assume personal loan and payday loans to be the same. A payday loan operates on a short time frame and it is due on the next payday while a personal loan carries repayment terms of 2 to 5 years. There are a few other features that distinguish these loans. Let us break down the benefits of a payday loan and a personal loan and the ways it affects credit score of a person.

Payday Loans

Payday loans for bad credit are of a short duration and bear a high-cost that gives cash needy consumers the money that they need till they get their next paycheck. Payday loans are basically made for tiny amounts and are not perfect for covering key expenses.

At the time of applying for a payday loan, lenders will inquire about the job status and the income source. You may also need to provide them an access to your bank account via submitting a post-dated check to recover the loan amount along with a finance fee once the paycheck is in your bank account.

On applying for a payday loan, a loan lender will evaluate your credit. In this way a payday loan will not influence your credit score. Failing to pay back full payday loan, you will be entitled to pay finance charges and an additional fee.

Who should go for a payback loan?

This is a convenient option to obtain cash for consumers who do not have savings or credit cards. But it can also be an expensive method to borrow money. Because of the high finance charges and fees associated with these loans, there are chances of falling into an unending cycle of debt. So, if are going through financial contingency or can’t cover the entire loan cost prior your next payday, then a payday loan is not ideal option for you.

What are personal loans?

A personal loan has a fixed rate of interest and repayment period. Here a lender would check the credit of a loan applicant at the time of applying for a personal loan. Each loan inquiry can reduce your credit score by a fraction.

In personal loans, a person may be needed to provide a collateral to avoid high-interest on their loan. This is because lenders want to safeguard themselves against borrowers who are not able to make their payments on time. A good side of personal loan is that it can be easy to avail a personal loan, and it usually does not need any documentation.

Conclusion

Learning about the features and differences between a personal loan and payday loan will help you make the right decision.