Difference between Pay Day Loans and Personal Loans

A loan bridges the gap between available capital and required capital to meet expenses. The requirement for the fund could be for immediate purpose or long-term. If you browse on the web about loans, dozens of loan types are available online to fulfil your fund needs. 

A layman with little financial awareness can easily misinterpret different types of loans. Two of the most commonly used terms Payday Loans and Personal loans are often used as same. But these terms are different and have separate features.

Let us understand both the terms and their difference in detail. We will conclude with a mutual viewpoint on these financial products for your reference.

What is Payday Loan?

Payday Loans are short-term loans with a comparatively high-interest rate. The repayment period remains short and desirable for the small urgent financial requirement. You should be ready to pay back within a few days before taking this type of loan.

As the name suggests, it’s monetary support until your next paycheck or salary credit notification on the smartphone. People use Payday Loans for car repair, house rent, installments on electronics and equipment, etc. You get a loan faster with minimal to nil documentation at a high payable amount.

How Payday Loans Works?

Several private companies provide Payday Loans such as Early Salary, Rupeek, etc. in India. To apply, you need to furnish employment status, income source, monthly income, or salary. The companies mostly use mobile application and verify through PAN card and Aadhar card details.

Once approved, the borrower needs to submit a post-dated cheque with the loan amount and processing charges. You can pay back before the due date or as scheduled. They also provide an option of a rollover, but you have to pay additional charges to do so.

Example

Suppose your salary is seven days away and you need urgent money for some personal needs. You apply for a Payday Loan for the tenure of seven days, and the principal loan amount is 20,000 at a 1 per cent interest rate per day.

Your payable amount within seven days: 20,000 (Loan Amount) +1400(1 percent of 20,000 for seven days) =21,400 INR

Considerations for Payday Loans

  • The faster and easy process of obtaining fund support has pushed the demand for Payday Loans exponentially. As per an article published in Economic Times, around 400 crores INR is being disbursed every month for Payday Loans in 2019.
  • The borrower must consider that it is a short term loan with a high-interest rate. They should borrow an amount that can be paid on the payday conveniently.
  • In case of delay, these companies charge additional fees. So, plan wisely, take a small amount and pay off within the agreed time, do not make it a habit.

 

What is Personal Loan?

Personal Loans are a more organised and formal financial product than Payday Loans. It is fund support given by Banks and NBFCs to individuals after checking credit score, income, address proof, etc. 

The loan tenure vary between one year to five years. Banks and Financial Institutions decide on the loan amount according to your profile including income and repayment capacity among other considerations.

Purpose of Personal Loans

Personal loans are unsecured and collateral-free capital support for multiple purposes. Lenders do not monitor the use of the money. Borrowers can avail of personal loans for weddings, home renovation, extension, higher education, and many more.

Interest Rates and Key Documents

The interest rate depends upon the lender and your eligibility. Your lender also offers special deals according to your profile and relationship with the organization. There are mainly two types of interest rates available for the personal loan: Fixed and Reducing Interest rates.

A Fixed Rate of Interest is applicable on the entire loan amount throughout the loan tenure. Floating or Reducing Interest Rate is applicable on the outstanding loan amount, subject to monthly EMI payments.

Documents vary as per the lender’s internal terms and conditions. Key documents required by all banks and NBFCs are residence proof, income proof, Identity proof, and education certificates.

Key Differences Between Personal Loans and Payday Loans

  • Personal loans can go up to 25 lakhs and pay back over one to five years of the loan tenure. Payday Loans are for a small amount & short duration and need to repay on the salary day.
  • Most of the companies providing Payday Loans, do not consider CIBIL scores. They sanction loan amounts based on job and physical verification. For Personal loans, lenders check credit score, financial history, income proof, and other vital details for loan approval.
  • For Payday Loans you need to submit a post-dated cheque with the loan amount. Whereas, for personal loans, you need to furnish details of income sources and financial history
  • Private money lenders, people involved in check-cashing services, mostly un-regulated financial bodies provide Payday Loans. Whereas RBI authorized Banks and NBFCs provide personal loans.
  • Personal Loan interest rates are comparatively cheaper than Payday Loans. But you need a healthy credit score, transparent financial history, and a stable source of income. Payday Loans charge higher interest and charge a further penalty in case of rollout or unable to pay on time.
  • Payday Loan borrowers are mostly from the sub-prime category of loan applicants, with a credit score less than 670. Banks and NBFCs generally reject personal loan applications with a credit score lower than 750.

 

Concluding Thoughts

Payday Loans and Personal Loans are useful financial products for different life situations. These are short-term loans to fulfill personal requirements and solve the fund crisis. The difference lies in their tenure, loan amount, and process of approval & repayment. So, if you need instant cash with readiness to replay in seven days to one month or as agreed in the loan terms, apply for payday loans.

If you need larger some for a longer tenure, choose a personal loan with a reliable lender. The suitability of a personal loan or payday loan depends upon urgency, credit score, repayment condition, and financial situation. Choose wisely after thorough research about the company and comparison of loan offers.

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