Completing financial goals and needs often requires the infusion of much higher capital than an individual might have in their bank account. This leads them to borrow money for fulfilling their commitments. Many people go in for a personal loan if they want extra money. Another financial choice individuals are making these days is opting for a payday loan.
A payday loan gives money based on the salary of the applicant. Currently, fewer lenders offer payday loans compared to personal loans. There are some crucial differences between the two borrowing options. Here is a detailed guide on how personal and payday loans are different.
Crucial Differences Between Personal Loans And Payday Loans
Objective: Payday loans are given by non-banking financial institutions or digital lending platforms to cover urgent cash needs in the short term. By contrast, personal loans are offered for planned major expenses such as marriage or travel.
Credit score: Banks and financial institutions conduct more stringent financial checks for a personal loan. This includes looking at the borrowing history and credit score of the applicant. Payday loans require less background checks and often rely on salary proof for quick approvals.
Interest rate and tenure: Payday loans have a higher rate of interest compared to personal loans. In terms of tenure, a personal loan can have a tenure of up to seven years, but payday loans need to be typically repaid in 30 to 60 days.
Amount: Many lenders offer personal loans of up to Rs 40 lakh, depending on the borrower’s profile. On the other hand, payday loans are based on the borrower’s salary and may be available for lesser amounts. These loans also have more hidden charges compared to personal loans.
Regulation: The Reserve Bank of India (RBI) is responsible for regulating personal loans. Payday loans comparatively have less oversight.
Personal Loan vs Payday Loan: Which Option To Choose?
The choice will depend on the needs of the borrower and their ability to repay. For people who need a larger amount of money with longer repayment times, a personal loan might be a better option. However, it will have a longer processing time compared to payday loans.
A payday loan is useful if you have urgent expenses that can be repaid in the short term. Applicants choosing this need to read carefully to understand the hidden transaction fee and other charges. It is prudent to consult a financial advisor before making a decision.
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