Payday Loans vs Personal Loans: What's the Difference?

Know the difference between payday and personal loans and how they compare to each other on basis of loan amount, term, eligibility and cost at IIFL Finance.

29 Oct,2022 11:40 IST 5 views
Payday Loans vs Personal Loans: What's the Difference?

With more people opting for loans to cover their certain and uncertain expenses, financial institutions have diversified their lending portfolios. Earlier banks and financial institutions offered a fixed catalogue of loan products with high-interest rates and limited repayment flexibility. However, a significant surge in financial literacy increased the demand for loans that suit their budgets and fix their immediate cash requirements. This is how the concept of customer-centric loans, such as Payday and Personal loans, spawned.

Personal and payday loans are practical in tackling unplanned emergency financial situations that can deplete your savings. This article explains the difference between a payday loan and a personal loan to understand better and make informed decisions.

What Is A Payday Loan?

Payday loans are short-term loans that offer instant cash with minimum application procedures. Often called advance cash, these loans are perfect for meeting unpredicted expenses that need immediate action. For repayment, the lender may ask you to opt for an automatic e-transfer from your bank account or write a cheque in their name.

Distinct Features Of Payday Loans

• The repayment period is relatively short, while the interest rates are usually higher.
• You do not need collateral to procure a payday loan.
• There is no fixed pay-out system for these loans. The loan terms depend on the lender.

What Are Personal Loans?

Personal loans allow you to cater to your personal and professional money needs. You can use them to pay for your child’s higher education, renovate your house, or consolidate multiple debts. Personal loans are collateral-free loans and thus unsecured. The lender assesses your credit history, income, and assets before sanctioning the loan amount.

Essential Features Of Personal Loans

• Personal loan lenders do not require collateral or a guarantor.
• The interest rate charged on a personal loan falls between a median range of 8-49% p.a.
• Lenders adopt a simple, paperless digital system for personal loan processing. It saves time and provides instant cash flow.
• The primary documents required for personal loans include an Aadhaar card, PAN card, water supply bills, electricity bills, bank statements, salary slips (for salaried employees), etc.
• A good CIBIL score can help in getting big personal loans at affordable interest rates.
• Personal loan lenders offer flexible repayment schemes to customers. You can choose from monthly, bi-monthly, or yearly EMI payments.

Payday Loan vs Personal Loan

Parameter

Personal Loans

Payday Loans

Borrowers

Personal loans are for everyone. You can be a salaried person, a professional, or an entrepreneur to avail of these loans.

Payday loans are a good option for salaried employees.

Objective

Personal loans help manage financial requirements involving substantial cash investments.

Payday loans are perfect for paying for the expenses that arise between two subsequent paydays. They are perfect for short-term expenditures.

Loan Interest Rate

The loan interest varies for each lender. It depends on the credit score, repayment scheme, and loan amount.

These loans have exorbitantly high-interest rates.

Loan Amount

Personal loans can fetch you higher amounts.

Payday loans deal with smaller loan amounts.

Loan Tenure

The term period of a personal loan can vary between 12 months (minimum) to 60 months (maximum).

The tenure of payday loans lies between two weeks to a month.

Hidden Charges

No hidden charges.

Payday loans have hidden costs.

Apply For IIFL Finance Personal Loans

You can access personal loans from several banks and NBFCs. IIFL Finance is one of the most trusted NBFCs leading the industrial sphere. The platform offers customised personal loan schemes with competitive interest rates. You can easily choose your EMI plan and complete the application procedures online with IIFL digital ecosystem. The portal offers eligible candidates safe, secure, and instant personal loans.

FAQs

Q1. Do payday loans affect your credit score?
Ans. Payday lenders do not officially have to inform credit rating agencies about these loans. Thus, they usually do not affect your CIBIL score. However, if you default in repayment, the lender reports this situation to debt recovery agencies, which can negatively impact your credit rating.

Q2. How to choose between payday and personal loans?
Ans. The choice between payday and personal loans depends upon your need and income status. Payday loans come with higher interest rates compared to personal loans.

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