There will come a time in your life when you’ll need additional finance to help you get to where you want to be, whether that’s to buy a house, pay for education, or to deal with an emergency expense.
But with so many options to choose from, how do you know you’re getting the best loan to suit you?
We’ll take a closer look at two of the most popular options below, payday loans and personal loans, to learn more about the difference between them and which is best for you.
What is a personal loan?
When referring to a personal loan, we’re talking about a loan that can be used to cover a range of costs, like home renovations, medical bills, important life events, and major purchases.
These loans tend to be offered by traditional lenders like banks, as well as online lenders.
They’re unsecured loans, which means you don’t need collateral to be approved, and they can cover a range of amounts depending on how much you need.
Typically, your lender will not tell you what you can and cannot use your loan for - it’s totally up to you.
What is a payday loan?
In comparison to a personal loan, payday loans are most commonly used to help with emergency expenses that your monthly income cannot cover.
For example, if you’re faced with an urgent home or car repair and you’re not sure how you’re going to pay for it.
Payday loans typically only offer smaller amounts of cash to be used to tide the borrower over until payday.
The repayment term tends to be shorter than personal loans, with lenders asking for payday loans to be repaid usually within the month.
They are also available online, which means they’re easy to apply for and lenders will be able to make a decision in as little as 24 hours.
What are some of the key differences?
So now we know a little more about the two types of loans, it helps to know more about how they differ from eachother.
Here are some of the key differences that you should be aware of:
- Loan amount:Payday loans are only meant to cover costs until you get paid at the end of the month, this means they may not offer as much as other types of loans. Typically lenders offer smaller amounts to make repayments more manageable. Whereas personal loans can range from smaller amounts to tens of thousands of pounds - depending on your credit score and lender.
- Credit score: Personal loans usually require a healthy credit score for your application to be successful, which makes them harder to be approved for if you’ve struggled to make repayments in the past. Payday loan lenders are more lenient when it comes to credit scores needed for approval, which means those that have bad credit can still benefit from emergency finance.
- Interest rates: Because payday loans don’t require a good credit score, lenders increase interest rates as the borrower may be more of a risk when it comes to repayments. Personal loans have lower interest rates as they’re typically only given to those with good credit history.
- Repayment terms: As mentioned above, payday loans are used to tide you over when faced with an emergency situation that you may not be able to pay for until payday. They are paid back in a short period of time, usually around a month. Personal loans have longer and more flexible terms that can be anywhere from a few months to a few years.
Which should you choose?
So, when it comes to choosing the best type of finance to suit you, there are a few things to keep in mind.
If you’re looking for emergency finance to help you with an expense that you did not account for, a payday loan could be the best option to help you manage your money.
Ensure that you choose a reputable lender and only apply for as much as you need and you can afford.
If you have a good credit score, you could take advantage of a personal loan to help you with a range of expenses, and choose from some of the most flexible repayment terms to suit you.
Generally, credit score plays a huge role.
If your credit score is less than impressive, don’t worry - you can still benefit from help when you need it most with a payday loan.