Personal loans (also called instalment loans) and payday loans are two very different products and it’s critically important that anyone consider taking out a short-term loan knows the difference between the two. Although both can be a useful source of finance, the difference in the repayment periods of personal loans and payday loans makes them suited to very different purposes.
Depending on your situation, one of these products could be the right option for you. However, you should always explore all your options and only access this type of credit if you really need to.
What is a personal loan?
A personal loan or instalment loan is one that’s repaid with a set number of scheduled monthly payments or instalments. The loan is still short-term, typically for a period of 6-12 months and it’s unsecured. That means no collateral like a car or house is used to secure the loan. Typically, this type of loan will be relatively easy to access and allow you to borrow relatively large amounts of cash. For further reading, here’s a comprehensive guide to personal loans from Wonga SA.
And a payday loan..?
With a payday loan, speed is of the essence. The loans can be agreed quickly and the money can be in the borrower’s account in less than an hour. The loans are also repaid very quickly. Once the loan is agreed, the repayment terms are usually 30 days. Unlike an instalment loan where equal repayments are made over time, the payday loan is repaid in one sum which includes interest and fees.
What is each type of loan typically used for?
- Personal loan– Personal loans are used by those who need to get their hands on a larger amount of money, typically to fund a specific purchase. That could be a payment for a car, a new boiler or some other purchase where the borrower cannot wait to save the money themselves.
- Payday loan– Due to the high level of interest they attract, payday loans should only be used if they can be repaid in full at the end of the 30-day period. They should also only be used for essential items. For example, if you have an unexpected but essential expense you can’t afford during the month, a payday loan could help you bridge that gap. Payday loans should not be used to buy clothes, pay for nights out or fund any other unessential items.
How long does it take for loans to be approved?
- Personal loan – As it is a longer-term agreement for a larger amount of money, lenders will typically take the time to evaluate each borrower’s ability to repay the loan carefully. Lenders will usually use a monthly net income/expenses formula to check the loan can be repaid and they may be willing to lend to those with bad credit.
- Payday loan – One of the main attractions of a payday loan is the speed with which it can be agreed. You can apply online and usually get approval within the hour. However, the ease of access should never influence your borrowing decision.
Although those are the basics, if you’re thinking about accessing a personal or payday loan then you should think long and hard. Are there other sources of finance which could be cheaper? Can you use savings? Can you borrow money from friends or family? Is the money essential? Only then are you ready to act.