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payday loans vs personal loans what is the difference
20 Sep 2018

Payday loans vs personal loans what is the difference

If you’ve never applied for a loan before, then it may shock you to see how many different varieties are available. There are big loans, small loans, secured loans; we could go on for absolute ages!

In most cases, the average person will probably be inquiring about one of two loan types; payday loans or personal loans. It’s a common mistake to assume that both of these are identical, just given different names. On the contrary, they are extremely different, which means you need to understand more about each of them before making your decision.

So, if you’re interested in either a payday or personal loan, then take a look at this in-depth guide to see how they differ:

Payday Loans

To start, we’ll look at payday loans, which have certainly grown in popularity over the last decade or so. Essentially, these loans are designed for people that need a small sum of money, almost immediately. They’re considered to be short-term loans as the borrowing period is usually not meant to be any longer than a month. The aim is that you apply for a payday loan when you need some money but currently don’t have the cash in your account. Perhaps you have a hefty bill or expense that unexpectedly landed at your feet, and you don’t get paid for another few weeks. In scenarios like this, getting a small loan to tide you over until payday is potentially very beneficial.

Applying for payday loans

When you compare the application process of getting a payday loan to getting a personal one, you see a massive difference. Mainly payday loans don’t require you to undergo a credit check. The whole process can sometimes be completed within a day, and it’s all very much instant. If you’re looking for a bad credit loan, then this is indeed the option for you. As long as you can prove you’ve got: a job, a UK bank account, and UK residency, then you’re good to go.

At Bonsai Finance, we provide the easiest way of applying for payday loans. Use our search tool, and you’ll be shown the best payday lenders for a bad credit loan that can help you out!

Repaying a payday loan

It’s vital that you know a thing or two about repaying your payday loan. As mentioned earlier, the period of repayments tends to be very short. We’re talking a few weeks maximum, or else additional fees will come into play. You need to pay the loan off in full, or you could end up paying way more than you bargained for.

Pros & Cons

There are clearly a fair few pros and cons of payday loans. They might be the perfect solution for some people’s financial needs, or they could be the absolute worst thing for you. Take a look below to see the advantages and disadvantages:

Pros:

  • Can apply for a loan and have the money in your account on the same day – very useful if you need quick money!
  • No credit check required, which is perfect if you have bad credit.
  • Provide you with an excellent short-term solution to a temporary money issue

Cons:

  • Outrageous interest rates and additional fees when the loan isn’t repaid on time.
  • Lots of dodgy payday loan companies out there, which is why you should use Bonzai Finance to filter out all the bad ones.
  • Not a permanent solution to money problems, and there’s also usually a limit on how much you can borrow.

The easiest way to summarise payday loans is that they’re a short-term solution for people that need a small amount of money right away. There are many times in life where you might have a costly month for whatever reason. Something might have happened that meant you no longer have enough money to cover all your bills. So, to avoid missing a payment and ending up in debt, you apply for a payday loan to cover these extra costs. Then, you get paid a week or so later, and can pay off the loan – in full – without incurring heavy interest charges!

Personal Loans

Now, we can move onto personal loans and how they differ from payday ones. To begin, a personal loan is not always considered a short-term loan. With these loans, you can borrow money and make repayments over a more extended period. In some cases, the loan repayment period is a couple of years; it depends on how much money you borrowed. You’ll also find that you can borrow more money with a personal loan when compared to a payday one.

Personal loans are incredibly diverse which makes them ideal for many different scenarios. A lot of people will apply for a personal loan to help cover a large payment they have on the horizon. For example, if you want to install a new conservatory in your home or make any other home improvements, then a personal loan is an excellent way to make the costs more manageable.

Applying for a personal loan

The typical application process for personal loans is much longer and more detailed than what you go through when applying for payday loans. To begin, you will have a credit check carried out before your application is approved. This may not be true for 100% of personal loan lenders – you can still get bad credit personal loans – but you’ll find the majority will do this. If you’ve got a good enough score, then you should be accepted. Following on from this, good credit scores usually mean you can apply more and get better interest rates.

The application process can take a few days or weeks as the lender has more to think about than a payday loan lender.

Repaying a personal loan

The repayment process for this type of loan is utterly different from payday ones. Here, you tend to be given a fixed monthly sum. You will pay this every month until the loan is repaid. If you miss any payments, or can’t make the full amount, then additional charges will be added on. Also, you can get personal loans with fixed or variable interest rates. A fixed rate means you will pay the same interest throughout the repayment period, while a variable one means it can change. There are advantages and drawbacks to each; a variable might mean your rate goes up, but it could also mean it goes down. Fixed ones mean you never have to worry about rising interest rates, but will miss out on a lower one if interest rates drop.

Compare this with payday loans, and you have more time to pay off your loan, more room to breathe, and a manageable payment plan.

Pros & Cons of personal loans

It goes without saying that there are some pros and cons of personal loans. They may be the better loan option for you, but some people could feel that payday loans are superior. As always, the best way to make your decision is to look at the good and the bad:

Pros:

  • Far easier to repay personal loans as you have more time to make repayments and an actual schedule to follow.
  • The cost of the loan can be much cheaper as you may get better interest rates with a good credit score.
  • Can borrow more money than you can get from a payday loan.
  • Provide multiple uses: can help you consolidate debt, pay for home improvements, or even pay for a new car.

Cons:

  • While there are bad credit personal loans, most lenders make you go through a credit check, which means people with a low score will struggle to be approved.
  • It takes time to get the loan application approved, so it’s not ideal when you need money almost immediately.
  • Will be paying back a loan for months/years, which some people don’t want to do as it’s just another thing to remember every month!

All in all, personal loans are a good option if you need to borrow quite a reasonable sum of money. If you’re prepared to repay it over time and can budget your payments well, then it’s a good option when you need some money to pay for an upcoming thing.

Conclusion

payday loans vs personal loansThe best way to conclude this guide is by bringing payday and personal loans together. What are the critical differences between the two, and who is best suited for each one?

Immediately, a fundamental difference comes in the length of the loan. Payday loans are short-term options than you have to repay almost immediately. On the other hand, personal loans are more of a long-term option that you can repay over the course of a few months or years.

Payday loans are a faster option as well, whereas personal loans take longer to be approved. There are also much higher interest rates on payday loans compared to personal ones, but you don’t need a credit check to get a payday loan.

In reality, payday loans are suitable for people that need a small bit of money instantly. You just need some cash to cover yourself until payday, and that’s all. Personal loans are for people that need a larger sum of money to pay for something much bigger but are prepared to repay it over time.

If you’re interested in applying for a loan, then check out Bonsai Finance today and use our detailed search tool to find the best option for you!