What's the Difference?
When you owe money, you might think that the type of loan you have doesn't matter. After all, if you have $500 in debt, you have $500 in debt and that's all there is to it. However, the type of debt you have can affect your repayments, interest rate, loan length and more.
So, how do the two most popular loan types, personal loans and payday loans, compare? Many people think that they are the same - but in reality they aren't. Here's what you need to know.
What is a Payday Loan?
A payday loan is a short-term loan that can also be called a cash advance, check loan, or payday advance. Most have a small maximum amount ranging from $500 to $1500 and have larger fees and interest rates than personal loans.
This is in part due to the length that the loan is meant to stay active.
In virtually all cases, a payday loan will be fully paid back within 30 days of the loan being taken out. It also has a higher interest rate due to the often unsecured nature of the loan - meaning there is nothing backing it if payments are not made.
These types of loans are made for people with poor or bad credit and they often have limited access to credit cards and need an unsecured personal loan. You have to be over 18 and a resident of the country with a history living in the same home with the same job and bank account to be able to qualify.
What is a Personal Loan?
A personal loan is a loan that is taken out from a bank, credit union, or online lender. Most are unsecured just like payday loans, however, they often have lower interest rates. This is because they are often used by those with higher credit scores to improve their home, pay for a medical bill, go on a vacation, or make a large purchase.
Unlike a payday loan, a personal loan can be taken out for a large and almost endless number of reasons, from cosmetic surgery to buying a dog or horse. That's what makes them the most common type of loans.
The length is generally longer as well, ranging from two years to five years, with the maximum loan generally being $50,000. Approval depends on your credit score, personal finances and even why you want the loan.
Payday vs. Personal
The key difference between payday and personal loans is how long you take them out for and what amount of money you need. If you need a lot of money for a longer time, then a personal loan is the solution.
On the other hand, payday loans are for extremely short lending when you (generally) need money to get by to the next paycheck. In addition, payday loans are much easier to get than personal loans.
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