Loans are a quick way to borrow money for issues like a medical emergency, debt consolidation, home remodeling, or any other project requiring financing. There are several different types of personal loans but in this article, we will be finding out the difference between payday loans and short-term loans. Both types have their pros and cons. Read on to find out which type would be the right choice for you.
Applying for the Loan
The application process for both personal loans and short-term loans is quite similar. For example, if you are a resident in the UK, you need to provide the lender with your citizen card to prove you are 18 years old or older, a bank account, proof of employment, and your last payslips. Some money lenders or brokers might ask you about your monthly expenses to assess whether you will comply with repayments or not.
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Service Charges
Payday lenders and short-term credit companies are restricted by law to never charge service fees and interest rates that might exceed the borrowed amount. Let’s say you have borrowed £200 from a payday lender for a month. The expected repayment at the end of the month would be around £248. However, when you borrow money from a short-term loan provider, you will get a much longer time to repay, but the service charges might be more. Therefore, it is best to always read the terms of repayment and be aware of the interest rates of the type of loan you are considering accessing.
Key Differences
As mentioned above, conventional payday loans are borrowed in case of an emergency and need to be returned within a month. On the other hand, short-term loans are borrowed for longer periods which can go as long as 12 months. Another difference between both types is the repayment fee and interest rates. Normally, in short-term loans, the interest rates are higher than in payday loans.
When you have borrowed a short-term loan, the monthly repayments might be affordable, but the repayment amount would be higher. The repayment options also slightly vary between the two types but as a general rule of thumb, early repayments can save you from any issues and avoid high-interest rates when payments are overdue. You can contact payday loan providers or short-term loan companies and ask them what benefits you would get if you made early repayments. For example, if you have borrowed money for 30 days, some lenders would decrease their service fees by 50% if you paid within 15 days.
Accessibility
Payday loans are much easier to borrow when compared to short-term loans. Individuals facing financial issues or having a hard time borrowing due to their bad credit score can also apply for a payday loan. However, these creditors will charge you higher interest rates than you would pay on a short-term loan.
Bad Credit Reporting
Short-term loan providers report your credit scoring to the credit bureau whereas most payday loan companies don’t. This means that borrowing money from payday loan lenders would not affect your credit scoring. On the other hand, personal loan providers can improve your credit score when you repay on time.
Direct Payday Loans vs Short-Term Loans
Direct payday loans are best for individuals who need credit and can repay at a later date within a month. The UK has a decent market of payday lenders and brokers which you can explore to borrow cash during an emergency. Before you sign up for a loan, ensure that the UK direct payday lender you are choosing is reputable and trustworthy. Doing this is crucial as substandard payday loan providers have hidden fees and charges and are not clear in terms of repayment conditions.
However, if you need to borrow credit for a longer period, you should consider applying for a short-term loan or other types of personal loans according to the issue you are facing.
Repaying Loans
Short-term loans have a higher repayment rate than payday loans because when you apply for a short-term loan, the lender reviews your credit score, debt to income ratio, or even asks for collateral against the loan if you have applied for a secured personal loan. These requirements have to be fulfilled to get your loan approved. In any case, if you fail to repay within due time, the collateral will be considered a repayment. You can also apply for an unsecured loan that does not require you to provide collateral. On the other hand, payday lenders don’t evaluate the credit score, debt to income ratio, or assess your ability to repay on time before lending the money.
Borrowed Amount
Let’s say you want to borrow a few hundred pounds for a short period. In this scenario, a payday loan would be the best choice. However, if you want a higher amount, consider applying for a short-term loan. You can always ask the lender or broker about how much you can borrow, but remember, your financial health, debt-to-income ratio, and credit score will all influence the amount available to you.
Alternatives to Personal Loans
Here are some alternative ways you can try to fulfill the financial emergency you are facing but remember, these alternatives might work for some and not for others.
Asking Family and Friends
If you are not willing to get a personal loan, consider asking your family, loved ones, or even your employer to lend you the funds you need. Be open about your financial situation if you feel comfortable and tell them of your emergency. Lastly, remember to be clear about the repayment process and mention the date you will be repaying them the money.
Home Equity
If the financial issues you are facing are not that urgent, you can apply for a loan against your home equity. The time taken for these types of loans to get approved is around 2 weeks so don’t apply for a home equity loan if you need urgent credit.
Credit Card Loans
If you have a credit card and a great credit score, taking a credit card loan would be a good alternative to consider as these loans have an interest rate lower than most personal loans.
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When comparing payday and short-term loans, payday loans are easier to get approved but charge high-interest rates. On the other hand, short-term loans have lower monthly interest rates and provide more time for repayment, but you will be paying more in service fees. Therefore, you should consider your requirements prior to deciding the type of loan that’s most feasible for you.
