Payday Loans vs. Personal Loans: What You Need to Know?

There can be instances when you’ll find yourself in need of quick funds. This can be because of a medical emergency in the family, an unplanned purchase, or any other unexpected expense. Whatever the reason is, arranging the required amount in a short span of time can be a little challenging, and this is when taking out a loan seems to be the easiest way.

Table of Content

• Understanding the Basics
• What is a Personal Loan?
• What is a Payday Loan?
• Payday Loans vs. Personal Loans
• Conclusion

Currently, there are various financing solutions available in the market that can help individuals take care of such emergencies. Payday loans and personal loans are two of the most popular options that borrowers prefer.

This article gives an overview of payday loans and personal loans while outlining all the important factors that differentiate them from each other.

Understanding the Basics

On the surface, payday loans and personal loans may seem similar due to their ability to provide immediate financial aid without any kind of collateral. But this is not the case! These two types of loans are entirely different from each other in terms of things like borrowing terms, rate of interest, eligibility criteria, etc.

What is a Personal Loan?

A personal loan is a type of unsecured loan that can be availed for a variety of purposes. Unlike other popular financing options, these loans have no restrictions in terms of the end usage of the disbursed amount. Since there is no collateral involved, the lending institution will perform a detailed background verification to check your creditworthiness. The loan amount you’re eligible for is mainly determined by your monthly income and repayment capacity.

What is a Payday Loan?

Payday loans, on the other hand, are short-term, unsecured loans that are very easy to obtain. As the name suggests, these loans are mainly used to bridge the gap between your paycheques so that you can take care of any urgent expenses. Known for their ease of access, these loans often come with high interest rates and higher processing charges. Just like personal loans, payday loans also offer complete flexibility in terms of fund usage, so you can avail them for a variety of purposes.

Payday Loans vs. Personal Loans

Here is a detailed comparison between these two financial options, on the basis of several different factors:

Loan Amount

Personal loans usually come with a higher borrowing limit than payday loans. In a personal loan, the lending institution will determine the loan amount on the basis of your credit history and monthly income. But in a payday loan, you can only borrow an amount that is equal to or less than your monthly income.

Interest Rates

This is another major difference between personal loans and payday loans. The interest rate on personal loans can significantly vary depending on the loan amount and your credit score. However, the average rate of interest applicable on these loans is lower than the one applicable on a payday loan.

Terms & Conditions

Although both of these loans are unsecured and do not require any kind of collateral, there is a significant difference in their borrowing terms. Personal loans have a detailed verification process, but the terms and conditions are less stringent. Payday loans, on the other hand, are a lot easier to apply for but can have strict borrowing terms.

Application Procedure

Nowadays, all types of lending institutions (banks, NBFCs, etc.) are offering payday loans as well as personal loans. You need to submit various documents for your personal loan application. Since these loans have a higher borrowing limit and tenure, a detailed background check is required before sanctioning the loan. But payday loans usually do not require any lengthy verification, and the documentation is also quite simple.

Repayment Terms

Like all other long-term financing options, personal loans also allow you to repay the loan in several small installments. Some lenders also give you the option to set up automatic payments to make things easier for you. But payday loans are typically paid back in one lump-sum payment. The borrower needs to pay the complete payment (principal amount + loan interest) in one go.

Conclusion

While obtaining a loan to take care of a financial emergency, borrowers often find themselves confused between a payday loan and a personal loan. Since both these loans come with their own set of advantages, you should always pick the one that suits your financial situation better. However, personal loans are usually favoured for their cost-effectiveness and flexibility. If you don’t want to pay unnecessarily extra in the form of interest, it is always recommended to go for a personal loan.

At Muthoot Finance, we offer quick and hassle-free personal loans at the most competitive interest rates. To make the right selection, you can explore all the loan schemes and use our personal loan EMI calculator for a more accurate estimation. For more information, you can also visit your nearest Muthoot Finance branch.