Payday Loans Vs Short Term Loans: Spotting the Differences
There may come a time when you need money quickly and easily. Getting a quick loan could be just what you need for short term stability. Several years ago, payday loans were all the rage. Over time, they lost popularity and had to adjust to being fairer to better meet the needs of the customers.
The payday loan is ideal when you need funds in between paychecks. Its purpose is to tide you over, and the expectation is that you pay it back when you get paid.
The short term loan is more flexible, particularly when paying it back. It gets its name from the brief period necessary for paying it off. These loans are a good option if you seek a way to resolve a cash flow challenge.
Typically, both these loans offer finance solutions for people who do not have a good credit score. For this reason, they do not have the best terms. However, they are convenient and available.
Amount Available to Borrow
Payday loans and short term loans differ on the available amounts for you to borrow. With a payday loan, you can typically borrow up to £1,000. With the short term loan, you can increase your borrowing up to £50,000. This depends on the terms of the loan provider.
The low amounts for payday loans ensure they are easier to pay back. In addition, with the short term loan, spreading out the repayments also makes them affordable.
Total Repayments Necessary
One key difference between payday loans and short term loans is the number of repayments that you need to make. This is because the payday loan has a shorter payback period. Typically, it needs to be paid within a month (30 days), with payments being made in bulk on a specific day.
With the short term loan, you can extend your repayments from two months to twelve months. You can make payments each month until you clear the loan. Ideally, payments are scheduled to align with your income payments.
You may be wondering which one will cost more by the time you are paying back. The best way to determine this is to use a loan calculator provided by the lender. For example, you can check whether it is cheaper to take a payday loan and repay within 30 days. Or whether staggering the payments over months will increase the final sum for repayment.
Different Interest Rates
Payday loans typically have very high interest rates in comparison to a credit card, for example. This interest rate may also be attributed to their speed and convenience when processing. On the other hand, the lender has more significant risk and higher processing costs, and the interest is their security.
Before choosing this loan, make sure it is for genuine emergencies. Using the funds from these loans for the wrong reasons could lead to lasting financial difficulty. When unable to pay back, the high interest rate can lead to crippling debt.
High interest rates are also an essential characteristic of short term loans. However, you can take some more control of your interest rate based on the amount of time you choose for repayments.
Ease of Getting the Loan
Both loans cater to emergencies, though payday loans are typically much easier and faster to access. This is due to their size, as they are smaller. In addition, the applications for payday loans usually take place online. When the application and approval process is complete, you receive funds immediately in your bank account. The entire process can take around five minutes.
You may need to offer additional information for verification and approval with short-term loans. Larger amounts being made available means more checks and balances. These include credit and affordability checks. These checks are guided by a financial authority and must comply with legal regulations.
Early Repayment Options
As these loans act as a stop-gap to get you back on your financial feet, it is worth knowing whether early repayment is possible. Daily interest charges may mean that you could cut down the total amount you pay back. With payback loans, early repayment brings down the total interest and is ordinarily possible. Short term loans tend to be more rigid in this regard, instead, requiring the fixed monthly repayment.
Similarities that you should note
Fundamentally, there are some distinct differences between these two loans. However, there are also similarities that you should pay attention to. The applicant needs to be above 18 years old for either of these loans. They also require to have a bank account. The financial institution recommends the minimum amount of earnings per month. Information requested includes monthly expenses to ensure that there will be funds available for repayment.
Understanding the differences makes it easier to discern which of these loans is ideal for you. For example, a payday loan is a viable option if you only need a small amount of funds. This is so that you can pay it back with ease from your upcoming paycheck.
For the short term loan, you can borrow a more significant amount. This is because you can make repayments over several months. It is also a much safer option, particularly when you want to avoid spiralling debt. Evaluate your need and keep in mind that the short term loan is preferred as it has less risk.