Payday Loan Vs. Personal Loan: Which Is Suitable for You?

Payday Loan Vs. Personal Loan: Which Is Suitable for You?

Personal loans and loans, despite their differences, have some similarities. First, they are both unsecured loans, which means that you won’t have to risk an item or property as collateral in order to take these loans. Next, both loan types have no restrictions when it comes to usage of the loan money, unlike other types of loans such as car loans, mortgages, business loans, etc.

Having said that, the key difference of payday loan and a personal loan is their loan duration. Payday loans have really short loan tenure, usually maturing in just a month. Meanwhile, a personal loan has a loan tenure of at least a couple of years and can go as high as 5 years.

Woman hand counting money

What Is a Payday Loan and How it Works

A payday loan is a short-term loan, also known as a cash advance. For the majority of payday loan providers, the loanable amount is varying, depending on the monthly income of the person applying for a loan. The interest rates can go for as low as 1%, and it is based on many factors, which includes the period of time it can be paid or repayment schedule of the loan, and the credit score of the person applying for the loan.

Most payday loans are intended for short term expenses, such as monthly bills, bills for credit cards, personal finance expenses, emergency expenses, and other unexpected expenses. They suit emergency expenses very well since payday loans have extremely fast processing times, and they do not require a lot of documents to submit like bank account records or credit history. As stated earlier in this article, payday loans are unsecured, with no collateral needed, in exchange for a higher interest rates.

Guy Signing Home Loan

What Is a Personal Loan and How it Works

Personal loans are loans that are taken either from banks, licensed moneylenders, or credit unions. Personal loans can be used for any purpose that you like, just like how credit cards function and similar to payday loans, they do not require collateral. However, this comes with the drawback of having a higher interest rate compared to loans backed with collateral, since lending institutions perceive unsecured loans as high risk loans.

The maximum loanable amount of personal loans is dependent on your income, and your employment status (employed or self-employed). Other factors include your other outstanding loans, credit card statements and your debt to income ratio. For self-employed, the main factors are the assets and liabilities of your business, as well as loans that you have taken for business purposes (if any).

Personal loans from various loan providers have different interest rates. Despite this, they are capped at 4% per month. The repayment period can be as short as 1 year, and as long as 5 years. Since you are able to borrow more with personal loans, they can be used for bigger expenses, such as vacations, debt consolidation, home renovation, wedding, expensive medical bills, car purchase, etc.

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Payday Loan and Personal Loan Comparison

In this section, we will discuss some of the biggest differences between payday loans vs. personal loans on different loan factors, such as interest rates, loan amount, loan duration or period of time it can be paid. This section can guide you on which one is the most suitable for you, let’s take a look at the major differences between payday loans vs. personal loans and decide which one is the best for you.

Annual Income Requirements

Payday loans are limited based on your monthly income, while personal loans are determined on your annual income and bank account statement other assets. As such, you will be able to borrow more with a personal loan. Payday loans are for smaller but immediate expenses, while payday loans are for big purchases.

Interest Rate

Even though both payday loans and personal loans are unsecured, personal loans still trump payday loans when it comes to interest rates. The overall cost of the loan is lower for personal loans compared to payday loans because of the lower interest rate. This can be helpful if you’re using it as a debt consolidation loan or to pay for an emergency. Not sure what is the difference? Check out secured vs unsecured loan.

However, interest rates will still depend on the moneylender’s assessment and evaluation. The maximum interest rate money lenders can charge is 4% per month and the maximum rate of late interest is 4% per month for each month the loan is repaid late.

Repayment Duration

Payday loans have really short repayment duration, typically lasting a month or less. Meanwhile, personal loans can have loan tenures as lengthy as 5 years.

Joint Applications

Some lending companies offering personal loans allow joint applications, where a family member such as your spouse, parents, or siblings can be a co-borrower. Meanwhile, a payday loan only allows a single loan applicant. This comes with a few advantages, such as negating a bad credit rating and inflating the income used to determine the maximum amount that you can loan.

Taking advantage of joint loan applications will allow you to take out larger loan amounts that you alone are not qualified for. Take note that this depends on the credit score of your co-borrower, which means that you can’t get a higher loan amount, or your loan application may be rejected outright if both of your credit scores are not that good.

Key DifferencesPayday LoanPersonal Loan
Annual income requirementsLimited and based on your monthly incomeBased on annual income, bank account statement other assets

Interest Rate
The maximum interest rate money lenders can charge is 4% per month  while the maximum rate of late interest is 4% per month for each month the loan is repaid late.The maximum interest rate money lenders can charge is 4% per month while the maximum rate of late interest is 4% per month for each month the loan is repaid late.
Repayment DurationShould be paid on your next paycheck or less than a monthLonger repayment tenure depending on your loan contract
Joint applicationsSingle loan applicantAllows a co-borrower such as relative or family members
Approval time30min to 1hour depending on the Moneylender30min to 1hour depending on the Moneylender

Girl is filling out application

Personal Loan Vs Payday Loan: Which One Should You Get?

In this section, we will discuss what loan type is the best for you based on many factors. The favorable loan type for you depends on your circumstance, so be sure to read carefully.

How Much Do You Want to Borrow?

As established previously in this article, you can apply for a higher loan amount with personal loans. If the expense you are trying to settle with a loan is huge, like a wedding, car repair, and other big expenses, a payday loan will not be enough.

As a basic rule, payday loans are for smaller expenses that you will pay within a month or less, while personal loans are intended for major expenses, payable in a year, or even higher. If you are just trying to purchase some personal expenses then your credit cards can be useful, though using a credit card nonetheless charges a little higher than regular loans.

How Soon Do You Need the Money?

Choosing between a payday loan or a personal loan is also dependent on the time constraints of the reason why you are taking the loan. If you really need the money fast (within the day, or the next few days,) it is recommended to take out a payday loan.

Payday loan applications are processed faster than personal loans. Since payday loans are easy to apply for, and the loan applications are processed in a timely manner, they are suited for expenses that require your immediate attention.

Having said that, you might be limited to the amount that you require with payday loans. As such, how much money you need to borrow and when you need it should go hand in hand when deciding on which type of loan to take.

Repayment Schedule

Payday loans are normally settled in full, on the next payday of the borrower. In contrast, personal loans have different payment schedules, differing from 12 months to 60 months. Your preferred repayment schedule is another important factor to consider.

Do you have the capacity to repay the entirety of a payday loan within your next payday? If you are having doubts, it is better to go with a personal loan and take advantage of its longer repayment schedule than risk defaulting on a loan. Defaulting on a payday loan comes with hefty penalties and more interest, which is something that you do not want especially if you are having financial problems.

Man showing has no money by turning out pocket

Borrow Only What You Can Afford to Pay

Do not be tempted to borrow an amount that you have no means of paying, especially when it comes to personal loans with higher loan limits. When taking out a loan, always remember that you will have to pay the entire amount in the future, plus the interest and other fees associated with the loan.

Do not borrow more than your capacity to pay, or you might find yourself spiraling in a debt trap, where you will take out another loan in order to settle your old loans. A debt trap is very hard to come out of, and you will soon be drowning in interests from all of your loans. Always weight in your budget and repayment capability when determining the amount of money that you want to loan.

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Decide With the Help of Loan Comparison Site

If you need more help on specific loan offers, you can visit a loan comparison website. For the best loan comparisons in Singapore, we recommend you to check out Loan Advisor. Loan Advisor provides a platform for comparing various loan offers in Singapore easily, allowing you to make an informed decision for your loan needs.

There are a lot of advantages that a loan comparison site such as Loan Advisor can provide you. It is much more convenient than contacting loan providers yourself and asking for quotes. You will be able to compare a greater amount of loan quotes from different lending companies without the hassle of doing it yourself.

In addition to the time saved by using an online comparison tool, it will also allow you to save money. Loan Advisor, when used properly, will allow you to find the lowest interest loan available in Singapore. Aside from this, you will be informed of which money lenders have good reviews from their customers, allowing you to stay away from shady money lenders. We recommend you to check the reviews posted on a specific money lender first before submitting your application so you can be sure that you are dealing with a reputable money lender in Singapore.

Conclusion

Money lenders such as banks, lending companies, and credit unions have their own policies when it comes to payday loans and personal loans. This can make it hard to choose with all the different terms and terminologies, but that process can be made easy with the help of this article, and Loan Advisor.

With Loan Advisor, you can check and compare the different loans available for you. Remember that loan providers serve a single purpose, to help you in overcoming your financial troubles. When taking out a loan, be sure to think about it thoroughly before finalizing your decision. Use all the tools available to you in order to determine which loan will best suit your circumstances.

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