Payday Loans vs. Personal Loans

Many American citizens are in the same emergency from unplanned debt according to CNBC. A survey conducted in January 2019 shows that about 60% of American households cannot cover the $ 1,000 incidental expenses without borrowing money in which case they have been subjected to loans online. If you are one of those Americans, you are not alone! Yet when it comes to critical times, it can be difficult to figure out which type of financial solution is right for you. 

Payday loans online have long been in demand by those who need cash to cope with an emergency. This is especially true for people without star credit or access to credit cards or other lines of credit. But what is the difference between payday loans online and personal loans, and which one is better when you face urgent financial needs?

Payday Loans & Personal Loans: What’s the Difference?

Personal loans are usually loans with conditions that vary. Time frames are usually over 12 months and can span several years. You receive a lump sum and you agree to pay a fixed monthly payment including interest over the life of the loan. Mortgages, car loans, and other personal loans are all types of installment loans. These types of loans usually require a credit check and good credit history as well as a possibly lengthy application process.

Payday loans online are a form of installment loan. However, their maturities are much shorter, interest rates are higher, and the loan amount is usually much less. Because the deadlines are so short, you often write the next payday check immediately after you get your loan. You are expected to pay a lump sum rather than a regular monthly payment. Loans online before paycheck are easy to obtain and do not require a credit check which is one of the reasons why they are so popular with all lenders.

The method of calculating commissions and interest on payday loans online is also different. In many cases, lenders do not talk about interest rates or annual interest rates at all. Instead, you are charged a flat fee. This means that you can pay $ 50 in commission on a $ 300 debt that you carried in just two weeks. If you convert this commission to annualized, it will be 434% per annum. This is much higher than the rates for most microloans like MoneyZap.com and others.

Payback time is another huge difference between personal loans and payday loans online. When you take out a personal loan, you usually have over a year to make payments. In some cases, you can have up to ten years or more depending on the loan amount and the lender you work with. Since you are paying off your borrowed money over a long period, each monthly payment should ideally be affordable and you should be able to make payments to your budget.

A payday loan is specifically designed for short-term loans. Usually, you only have about two weeks to pay off the entire loan amount including the commission you owe. This is a huge problem because it means that you have to collect a large lump sum in a very short time. Most people who take payday loans do so because they urgently need cash.

Unfortunately, if you find yourself in a difficult financial situation, it is unlikely that your financial situation will improve dramatically within the two weeks it takes to prepare for repayment. As a result, many people are unable to pay off the full amount of their loan as soon as they receive their paycheck. This leads to more borrowing and higher fees which can lead to a debt spiral. This is where your future paycheck is always promised to the lender. The lender then invites you to take out another payday loan online to cover your expenses as your check went missing before you earned it.

Since payday loans have serious drawbacks in terms of both payback time and cost compared to personal loans, always aim for a personal loan if you can. Be sure to read the fine print of any lender you work with and confirm that you know both the costs you will pay for your loan. Also, consider the time you have to get out of debt.

Which is Better: Online Payday Loan or Personal Loan?

The best loan type for you depends on many factors. But if you can get a payday loan online, you will generally live better than with high-interest personal credit. Yet online payday loans that target the same last use case have much lower interest rates than a personal loan. MFIs offer interest rates no higher than 199% which is half of what you might encounter with an online payday loan. If you decide to move forward with any type of loan, then make sure you fully understand exactly how much it will cost you.

When you are considering a payday loan or personal loan online, make sure you do the math. Calculate interest on a payday loan online and compare it with the terms of a personal loan to understand the total cost of debt. Also, consider whether you are at risk of falling into the loan trap. Typically, personal loans offer options that are easier to integrate into your budget than payday loans. Still, any loan you decide to take should be made as a fully informed decision.

The main difference between microcredit and a usual one is in the registration procedure. To apply for microcredit online, a client will need a passport, a tax identification number (TIN), and a bank card for crediting money. To apply for a payday loan online, you do not need a certificate of income, official employment, and moreover, collateral.

Micro credits are approved in about 90% of cases and money can be credited to the client’s card within 30 minutes. Even a person with a bad credit history can approve an online microloan. For loyalty and an easy registration procedure, you have to pay with interest because of which the client’s debt is growing rapidly. MFOs may require an additional fee for a loan or charge up to 2.2-2.3% per day, that is, over 800% per annum.t