Finance

Emergency Loans vs. Payday Loans: Which is Better?

Have you ever been in a situation where you are short on cash but have an emergent situation that needs money instantly? Well, it’s not a very pleasing situation. Luckily, various platforms offer instant loans any time you need them. There are emergency loans and payday loans. If you need an emergency personal loan, you will surely get it from personal loans.

You should understand emergency loan and payday loan and how they work before choosing the most suitable option. Continue reading to know the better option.

Overview of emergency loans vs. payday loans

A personal loan is the amount one borrows to cater to any emergency expenses or other personal needs. You can use the cash for emergency purposes, and the tenure can range from 1 to 5 years.

A payday loan is a short-term emergency loan. Typically, it has a higher interest rate than the personal loans. It also has a short tenure and requires the borrower to repay within the next paycheck.

So, which one is better? Stick to the article; we will analyze the two critically and help you decide.

How personal loans works

Various platforms offer personal loans, such as credit unions, online apps, or banks. You just have to apply for the loan from the personal loan lender of your choice. When you apply, the lender will go through your application and can accept or reject it depending on various factors. Next is to wait for your funds.

You can also get personal loans from NBFCs. Actually, it is easy since you only need the internet and a computer or a phone. The application process is fast and easier since it is paperless. Besides, there is an online calculator to help you calculate the EMIs to pay monthly.

When applying for personal loans, ensure your credit history is good because the lender will perform a hard inquiry, and if you don’t have a good history, it can lower your score.

Personal loans can be used for any purpose, be it weddings, debt consolidation, vacations, and medical treatment. You are not limited in how you use the funds.

How payday loans work

Paydays are also known as cash advances. They usually have the least maximum amount but with the highest interest rates. They are paid on the payday, which is about a month. Their annual percentage rate is approximately 400% and may include hidden costs. The best thing about payday loans is that even those with poor scores can get them.

Here’s what you need to apply for a payday loan:

  • Valid identity card.
  • Bank account.
  • Income statement.
  • Be 18 years and above.

There are online lenders offering payday loans, and it is easy to qualify for them. However, the interest rate is very high. So, always choose your lender well to avoid paying the high-interest rates and other extra charges.

Personal Loans and Payday Loans: Similarities

Purposes: Both can be used for emergencies because they are approved instantly.

Duration: They both are short-term loans, with payday loans having the shortest tenure.

Interest rates: Both loans require the borrower to refund with interest rates as agreed.

Collaterals: These loan options do not need you to provide an asset to secure them.

Emergency personal loans vs. payday loans:

We have discussed how these two loans are similar, but there are also some differences. The following are areas where they differ:

Maximum loan amount

Payday loans are usually limited to a few thousand rupees, and the amount you can get depends on your monthly income. You will get a higher loan amount if you have a high income. This is because payday loans are determined based on the income you earn a month.

On the other hand, the amount you can get for personal loans is higher than payday loans. They are not entirely tied to your income because they have a longer payment duration.

Loan tenure

Payday loans have a shorter loan tenure which is approximately 30 days. Payday loans are paid within the next payday and include the interest rate. On the other hand, personal loans have a longer loan tenure and can range between 1-5 years, depending on the personal loan lender. The loan amount is usually divided into monthly installments plus the interest.

Interest rate

Personal loans have a low rate ranging from 10% to 36% per annum. If you take a personal loan, the lender will use this rate to calculate your interest. However, payday loans are one of the loan options offering the highest rates and using different criteria to charge interest.

Effects on credit score

Personal loans may reflect on your credit report because most lenders notify the credit bureaus once you take the loan. On the contrary, payday loans are short term loans; hence there is no need to notify the bureau. However, if you fail to pay, it will affect your credit score.

Verdict

This guide makes it easy to choose a loan option between personal loans and payday loans. Payday loans are very expensive due to high-interest rates and lump sum repayment installments. Given the long repayment period and low-interest associated with personal loans, we can say they are the best options.