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Payday Loan vs Personal Loan - What is the Difference
A loan can be an excellent way to cover small and large expenses. Earlier, loan seekers were stuck with a limited selection of loan products from credit unions and financial institutions. However, with increasing people’s awareness about financial matters, the demand for loans has seen a boost. As a result, lending institutions design various credit options to suit everyone’s needs. Personal Loans and payday loans are the most popular funding options available these days. While both have pros and cons, let’s explore payday loans vs. Personal Loans to understand which better suits your financial requirements and repayment capability.
What is a Personal Loan?
Personal Loans are the most flexible credit products available in the market. Being unsecured, they do not require any security, collateral, or guarantor. Moreover, these loans have no usage restrictions, meaning you can use them for any legal purpose, including home renovation, medical emergency, wedding expenses, debt consolidation, education, vacation, etc.
Personal Loan providers, including Hero FinCorp, look at your income, credit history, repayment capacity, work experience, etc., before approving your application. Once approved and disbursed, you must repay the funds with interest within a pre-determined repayment tenure.
Personal Loans come with various benefits, including flexible tenure options, quick disbursal, no hidden charges, minimal documentation, etc. A Personal Loan EMI calculator lets you know the monthly EMIs in advance, helping you determine your repayment capacity according to your income and financial obligations.
Read Also: Payday Loans in India – What Is a Payday Loan and How It Works in India?
What is Payday Loan?
Payday loans are short-term, collateral-free loans that give instant access to funds. You may borrow a payday loan to manage your monthly expenses until your next paycheque arrives. Lending companies specifically design these loans for working-class people who face a cash crunch between their salary dates. The loan amount usually depends on your monthly salary, which you can prove with your pay slips. If you need to fulfil an unexpected cost in the middle of a month, you can apply for a payday loan and pay it right away. However, one drawback is that these loans have high-interest rates due to the high risk of default.
Payday Loan vs. Personal Loan
After understanding the fundamental meaning of both loans, let’s look at the payday loans vs. Personal Loans. Understanding the distinction between them will help you make a better financial decision:
| Parameter | Personal Loans | Payday Loans |
| Target Borrowers | Almost everyone, whether salaried employees, self-employed professionals | Better funding options for salaried employees with financial crunch between paydays |
| Primary Objective | To manage financial needs involving considerable cash arrangement | To pay for urgent short-term expenses arising between two subsequent paydays |
| Interest Rate | Vary for each borrower depending on the credit score, loan amount, repayment term, repayment capacity, income, DTI ratio, work experience, etc. | Higher interest rates than Personal Loans |
| Sanction Size | Higher loan amounts to cover big-ticket expenses like home renovations, vacations, higher education, medical emergencies, etc. | Smaller loan amounts to cover short-term expenses like utility bills, education fees, moving costs, etc. |
| Repayment Tenure | Medium repayment tenure up to 60 months | Shorter repayment tenure from 15 to 30 days |
| Hidden Charges | Transparent procedure with no hidden charges | Hidden charges might be involved due to hurried application and approval |
| Availability | Most reputable lending institutions, including Hero FinCorp, offer Personal Loans through branch offices, websites, or loan apps. | Only a select few loan companies offer payday loans in India. |
| Eligibility Criteria | A stringent set of eligibility criteria involving your age, income, work experience, employment, occupation, etc. | Flexible eligibility conditions based on your income, identification, and bank account |
| Credit Score Requirement | Lending companies expect a decent credit score to determine your creditworthiness. | Loan providers approve payday loans primarily based on your salary. |
Read Also: What Are the Alternatives to A Payday?
Interest Rate for Payday and Personal Loan
When looking at the payday loan comparison with Personal Loans, you will find that interest rates of payday loans are significantly higher than that of Personal Loans. While Personal Loan interest rates depend on your credit profile, employment, work experience, income, etc., payday loan interest rates are higher due to their urgent service and the bigger risk they take in lending you.
Conclusion
Personal Loans and payday loans are designed to fulfil different requirements. The loan amounts, interest rates, repayment terms, etc., differ. While both have pros and cons, you must settle for one that best suits your funding requirements. After understanding payday loans vs. Personal Loans, you can make your borrowing decision with more conviction. Use the Hero FinCorp Personal Loan app to apply online and get the required funding instantly.
Frequently Asked Questions
1. Is a payday loan secured or unsecured?
Payday loans are unsecured, which you can obtain without collateral, security, or guarantor. Personal Loans are also unsecured.
2. What is meant by a payday loan?
A payday loan is a short-term funding option you can borrow to fulfil your requirements before your next paycheque arrives.
3. What is another name for a payday loan?
A payday loan is also known as a cash advance, which means it is like an advance cash you borrow before your salary gets credited into your account.
4. Is a payday loan revolving or an instalment?
A payday loan is neither a revolving loan nor an instalment. You must repay it in lumpsum after your upcoming payday. It is not revolving, as it is not an open-ended credit line.
5. What is the difference between an instalment loan?
An instalment loan, such as a Personal Loan, is a loan you must repay in EMIs. However, when you borrow a payday loan, you must repay the entire borrowed amount in lumpsum after your paycheque arrives.
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