Understanding Loan Types
According to Magnifyingmoney, a personal loan typically attracts a fixed interest rate and lengthy repayment terms not exceeding 5 years. The interest charged on this loan falls in the 6% to 35% range. The interest on a unsecured loan varies from one institution to the other. The threshold of getting a personal loan is higher compared to that of payday loan. This makes it difficult for people with bad credit to get approval. The eligibility requirements for obtaining a personal loan include; proof of income, personal identification, credit check and bank account. Depending on the lending institution, the borrowed amount usually ranges from $1,000 to $50,000. The repayment period for payday loan is around two weeks. The payment includes a borrowing fee and other charges ascribed by the lender.
As part of a wider strategy to tame dishonest lenders, most states have ratified laws limiting the fee charged on payday loans to $10 to $30 for every $100 borrowed. The loan also attracts a high APR that can go to as high as 400%. Most payday loan lending institutions require proof of income, personal identification and bank account before approving a loan. The loan amount is usually capped at $500 or less. Most borrowers tie the amount to the borrower's earnings or paycheck. The loan can be repaid through electronic bank authorization and postdate check.
Pros and Cons of Payday Loans and Personal Loans
Pros of Personal Loans
- Speedy processing and disbursement of funds
- A good credit score attracts low interest rates
- You do not need a collateral to get approved for the unsecured loan
- The fixed rate attached to personal loan makes it easy to plan or budget your finances
- The segregated, timely repayment on loan can go a long way to boost your credit score
Cons of Personal Loans
- Approval is dependent on having good credit
- The loan attracts various borrowing fees, including the origination charge
- If you have an ongoing subprime credit, you may be charged higher interest
Pros of Payday Loans
- Easy to qualify since credit checks are not mandatory
- Once approved, expect immediate disbursements
- The loan can help you ease an immediate financial strain
- The loan can be rolled over if payments cannot be made on time
- The amount can be offered in cash, direct deposit or via prepaid debit cards
Cons of Payday Loans
- Amount is usually capped at $500 or less
- Some states don't approve this loan facility
- High APR that can go as high as 400%
- High fees from $10 to $30 for every $100 that is appropriated to the borrower
- Repeat rollover makes the loan expensive
Choosing the right type of loan and lender for your needs
The differences between payday loan and personal loan can be traced to factors such as the loan amount, eligibility, loan terms, fees and the type of lenders offering the facility. The terms for payday loans are shorter and typically extend for 2 weeks to 4 weeks. Personal loans have a drawn-out term that can go anywhere from 1 year to 10 years, depending on the lender. According to the Finder finance resource, here are 3 key questions to think about when choosing a lender:
1. How much money do I need? How quickly do I need it?
If you are looking to borrow $50 to $1000, you may consider applying for a short term loan such as payday loan. This type of loan has a quicker turnaround, which means faster approvals. Payday loan can easily be sought from short-term lenders, online lenders, retail check cashers and non-banking institutions offering the facility. Regarding personal loan, the minimum amount you can borrow is strictly between $1000 to $2000. Due to the lengthy approval process associated with these types of loans, the processing period may also take longer. Personal loans can be obtained from credit unions, banks, online credit providers and P2P lenders.
2. How does my credit score and credit history look like?
A personal loan is a better option for people with solid credit history. Having good credit (580 and above) gives you the opportunity to enjoy low interest and save money. Borrowers with subprime credit may attract higher interest rates even with good credit scores. There are banks and credit unions that may be willing to work with you and clear any obstacles that may stand in your way. This usually applies if you have a good standing on active debts and past accounts.
3. How much interest and fees can I expect from the loan?
This assessment can be made by analyzing items like Interest rate, APR, prepayment penalties, loan term, origination and closing fees and total repayment. On average, the cost implications associated with payday loans are higher than those of a personal loan. With a personal loan, you can also borrow as much as $50,000 and enjoy flexible, negotiable repayment terms. The flexible interest here typically ranges between %6 to 35%. Before applying for any loan, take time to research payday and personal loan providers to find one that is most favorable to you.
A growing number of people are turning to short term and long term loans to cover unexpected expenses or bridge income shortfalls. Both payday loan and personal loans have pros and cons that need to be considered. To guard the interest of consumers, the Federal Trade Commission (FTC) has put out some red flags to look for when seeking loans. Some of the red flags to be wary about include issuance of loans without clearly referenced fees and a request to submit upfront fee.