It is quite common to run out of cash a week or two before receiving your paycheck. In fact, 58% of borrowers have trouble meeting all their monthly expenses. The problem arises when emergencies come knocking on your door while you are on the blink of running out of cash.
In such situations, loans can be lifesavers, but not all loans are made equal. You will often have to choose between applying for a payday loan or a personal loan. While your choice will trickle down to your specific situation, knowing how to differentiate the two can help you make the right decision.
Here’s a guide for choosing between payday and personal loans:
What Are Personal Loans?
Personal loans are meant for personal expenditure and can be issued both online and through banks with no collateral at all. For instance, you can enjoy online installment loans instant approval without having to offer your car or house as collateral. However, personal loans can take a day or two to get approved due to paperwork.
Lenders will typically need you to present them with proof of income, tax returns, credit score, and your pay stubs to evaluate your chances of payment. Your credit score, among other factors, will then be used to calculate the rate at which the lender can offer you a loan. You can then pay it down over months or years depending on your agreement with the lender.
Pros and Cons of Personal Loans
Personal loans tend to have a low-interest rate in comparison to payday loans which makes them the best option when you need cash fast. You can use them to pay down your credit card debt through debt consolidation. Given that they have a lower interest rate than most credit cards, they can be a great option for those with debt issues.
On the flip side, there are cases when they might have a higher interest rate than the average credit card. This is mainly because they are tied to your credit score, and having a low credit score will mean high rates. Also, considering the amount of documentation you need to get approved for such loans, the approval process might be too long for some.
What About Payday Loans?
Payday loans are meant to help people bridge common financial gaps between paychecks when the borrower runs out of cash. They are high-interest loans that are meant to be paid off by the borrower during the next payday or can be rolled over to the preceding payday at the cost of a fine. As a result, the amount offered cannot exceed the normal salary of the borrower.
Lenders typically need to evaluate the borrower’s income status and bank account to determine the loan limit that they will set. This limit can be increased once the borrower continues to have a great standing with the lender over the life of previous loans. You can pay the loan on or before the due date, or even after the agreed upon date as long as you are ready to offset the rollover fine that arises.
Pros and Cons of Payday Loans
One advantage of payday loans is that the borrower requires no credit score or history, but the chances for securing the loan only depends on their current financial situation. They are ideal for people who have battled with bankruptcy and low credit scores. The loan amount offered can be flexible depending on your paycheck.
On the flip side, the interest rates of payday loans are typically higher when compared to those of personal loans. If not careful, you might end up trapped in a cycle of debt where you keep on renewing the loans month after month in order to offset the resulting fines and interest rates.
Personal loans are cheaper and preferable to payday loans, but you need to have a good credit score and some patience. If you lack any or both of the above, then the extra cost of a payday loan may be worth your while. Be sure to weigh your options to make a wise financial choice.