Payday Loan or Personal Loan? What is Better for Your Financial Needs?

Introduction

Two common options are payday loans and personal loans, but they come with significant differences in terms of interest rates, repayment terms, and overall impact on your finances. Although both options can help one get access to funds, it is important to know which of the two is more suitable for one’s needs. Atlantic Stewardship Bank (ASB) provides personal loans which are more sustainable than the payday loans. In this article, we’ll discuss the differences between payday loans and personal loans so you can decide which one is right for you.

1. What is a Payday Loan?

Payday loans are small, short-term credit products designed for urgent needs. To better understand their implications, explore this detailed guide on how payday loans work.

Key Characteristics of Payday Loans:

• High Interest Rates: 

Payday loans can have very high levels of implied interest rates expressed in annual percentage rates (APR), which can reach and exceed 400%. This can result in accumulation of debts since one is unable to pay the loan together with the interest accrued by the due date.

• Short Repayment Terms: 

A majority of payday loans are due in two to four weeks, which is difficult when you have not improved on your financial status.

• No Credit Check: 

Being short term loans, payday lenders may not conduct credit checks, thus are open to those with poor or no credit ratings. However, it is a disadvantage that there are no stringent measures in such circumstances that may result in exploitative credit stake. For safer options, consider exploring a loan with no credit check from trusted providers.

2. What is a Personal Loan?

A personal loan is a more conventional type of credit that has a lower interest rate and a longer payback period than payday loans. Personal loans can be taken for any purpose including but not limited to paying off credit card balances, renovating a house, or to cater for an urgent need. Learn more about the benefits of personal loans on Investopedia.

Key Characteristics of Personal Loans:

• Lower Interest Rates: 

Personal loans usually have much lower APRs than payday loans, often ranging from 6% to 36%, depending on your credit score and financial history.

• Longer Repayment Terms: 

Personal loans offer repayment terms that can range from several months to several years, making it easier to manage monthly payments.

• Credit Check Required: 

Lenders typically conduct a credit check before approving a personal loan, which means your credit score will play a role in determining your eligibility and interest rate.

3. Comparing Payday Loans and Personal Loans

When choosing between the two, evaluating your credit options is essential. You can check your eligibility for personal loans at NerdWallet.

Interest Rates and Fees:

• Payday Loans: 

As mentioned, payday loans come with extremely high interest rates and fees. These costs can quickly add up, especially if you’re unable to repay the loan on time and need to roll it over into a new loan.

• Personal Loans: 

Personal loans offer significantly lower interest rates and more transparent fee structures. With a personal loan, you’ll know upfront how much you’ll need to repay each month, making it easier to budget.

Repayment Terms:

• Payday Loans: 

The short repayment term of payday loans can be a major drawback. If you’re unable to repay the loan in full by the due date, you may be forced to take out another loan to cover the balance, leading to a cycle of debt.

• Personal Loans: 

Personal loans offer flexible repayment terms, allowing you to spread payments over several months or years. This makes it easier to manage your finances and avoid falling behind on payments.

Impact on Credit Score:

• Payday Loans: 

Because payday lenders typically don’t report to credit bureaus, taking out a payday loan won’t help you build credit. However, if you default on the loan, the lender may send your account to collections, which can negatively impact your credit score.

• Personal Loans: 

Personal loans can positively impact your credit score if you make on-time payments. Lenders report your payment history to credit bureaus, so a personal loan can help you build or improve your credit over time.

Eligibility Requirements:

• Payday Loans: 

Payday loans are generally easy to qualify for, as they don’t require a credit check. However, this accessibility comes at a high cost.

• Personal Loans: 

Personal loans have stricter eligibility requirements, including a credit check and proof of income. While this may make it harder to qualify, the benefits of lower interest rates and better terms make it worth the effort.

4. When to Choose a Payday Loan

Despite their drawbacks, payday loans can be a viable option in certain situations. If you’re facing an emergency and have no other options, a payday loan may provide the immediate funds you need. However, it’s essential to use payday loans sparingly and only if you’re confident you can repay the loan on time.

Consider a Payday Loan If:

• You Need Cash Immediately: 

Payday loans are rather beneficial if you have no available cash or other types of credit available for you to borrow.

• You Have No Credit: 

In case your credit score is poor and you cannot access a personal loan, then you will have no choice but to take a payday loan.

• You Can Repay the Loan Quickly: 

If you are sure that you will be able to pay the money back at the end of the month, then a payday loan is a solution.

5. When to get a Personal Loan

In the case of most borrowers, a personal loan is the best solution. Personal loans have relatively lower interest rates, longer repayment period, and an opportunity to establish creditworthiness compared to the other forms of credit.

Consider a Personal Loan If:

• You Have a Good Credit Score: 

It is cheaper than the other forms of credit since you can get a personal loan with reasonable interest rates if you have a good credit rating.

• You Need to Borrow a Larger Amount: 

Personal loans provide higher credit limits than payday loans, and thus are appropriate for larger expenses, for instance, medical expenses, renovation, or consolidating debts.

• You Want to Improve Your Credit: 

If you pay the loan on time, you will be able to have a good credit score that will enable you to have other opportunities of having loans in future.

Bottom Line

While choosing between a payday loan and a personal loan, it’s important to evaluate your financial standing, requirements, and your willingness to repay the loan. Payday loans, though can provide the necessary amount of cash for a short period of time, are very expensive and have short repayment periods which makes them dangerous for most consumers. On the other hand, personal loans are cheaper and more viable as they attract lower interest rates, longer repayment period and can boost your credit rating.

Ready to explore your personal loan options? Contact Atlantic Stewardship Bank today to learn more and start your application.