Payday loans vs personal loans.
Are you seeking for payday loans? It is important that you are familiar with some things about payday loans before you go head long for it. There are people who still don’t understand the differences between personal loans and payday loans. Having applied for personal loans and were denied on the ground of bad credit, don’t think that you have gotten to the end of the road. There are still options which you can still consider. One of these options is “payday loans”. However, you need to note that I am not recommending payday loan to you. You need to personally assess your situations in order to determine whether it is proper for you and the circumstances that surround you. This article is essentially to throw lights on what payday loan is all about.
What is payday loan?
Payday loan is simply a form of short term loan which an individual can take against his future pay check in order for him to meet his immediate pressing needs. Payday loans can also be called post-dated check loans, cash advance loans, check advance loans, or deferred deposit loans. Essentially, payday loans are used to bridge a temporary gap between pay checks. It is a short term loan usually for a period of less than one month. However, there are payday loan lenders that can allow you to choose repayment period so that you don’t necessarily have to repay at month end. Payday loans are meant to make cash available to you before your payday. The amount involved may range from one hundred dollars to one thousand and five hundred dollars. That is why some people call it small dollar loan. Payday loans can be a function of the amount you need, the size of your income and state law limitation. It is not uncommon that a pay check may be delayed for few days for one reason or the other. Supposing you are expecting a check at the end of the month and the check is delayed for say like fifteen days. What happens if you have utility bills to pay while you are waiting for the check? In a period like this, some people resolve to apply for online payday loan. Because of the small amount involved in payday loans, you will find out that it is easier to secure than personal loans. If you are looking for loans for people with bad credit, you may consider a payday loan. Payday loan lenders may not even check your credit. That is why some people refer to payday loans as no credit check loans. If you need money, and you need it quickly, whether for an emergency situation or an unexpected expense, there are many payday loan companies spread across the country. If you search for “payday loans near me”, you will be greeted with various offers.
Personal Loans Vs Payday Loans
Having explained what payday loans mean, let’s try to compare the two different loans.
- Size of the loan: Personal loans size range from $1,000 to $50,000 while that of payday loans range from $100 to $1,500. If the amount you require is quite significant, payday loans will not be a good option. You will need to apply for personal loans.
- Duration: Payday loans last between one to two weeks. The borrower is expected to pay back the payday loan within two weeks or when he receives his pay check at month end. For personal loans, the borrower has between one and five years to repay the loan.
- Collateral: No collateral is required before payday loans can be granted to the beneficiary. However, for personal loans, assets may be required as collateral. Although this is not compulsory but it might be required under certain circumstances.
- Credit score: People with bad credit score usually find it difficult to secure personal loans. The health of one’s credit score has a crucial role in determining whether his application for personal loans will be granted or not. In case of payday loans, emphasis is not laid on the credit score. Instead, the lender is more concerned about the proof of applicant’s income and whether the value of next pay check is substantial enough to guaranty the repayment of the payday loan if granted. The lender may not likely check the credit report of people applying for payday loan. However, in case of default in payment, the Credit Bureau may know about it and this may hurt your credit score.
- Annual Percentage Rate (APR). The annual percentage rate for Personal loans ranges from 3.5% to 20% while that of payday loans can be around 390% and above. That will show you how expensive payday loans can be.
- Repayment term: Payday loans are not instalment loans. Both the principal and the interest are expected to be paid at once. The borrower must have deposited the check for the repayment with the lender before payday loan is released. In case of personal loans, repayments are made on fixed instalment amounts over a specific period of time.
Advantages and Disadvantages of Payday Loans
Let’s start with the advantages of payday loans. Below are the advantages:.
- Payday loans lending institutions don’t give your personal and banking information to other companies if there is no default. Therefore your information is secured.
- In term of application and qualification, payday loans or payday cash advance is quite easy when compared to personal loans and small business loans. You just need to ensure that you have sufficient income that will cover the repayment. It is also good if you have never defaulted on another payday loan in the past.
- The restriction on the amount you can borrow at any given time prevents you from excessive debt. This makes payday loans to be easier to pay when they are due.
- State laws and legislation tend to protect borrowers from extremely high interest rates and fees. It is advisable that you are familiar with the laws governing payday loans in your state.
- Both the online application and receiving of payday loans only takes a few minutes. Many payday loan lenders can give you a guarantee that you will receive your money within one hour after your payday loan application has been approved.
- You can use the proceeds from payday loans for anything. There is no restriction on how you can apply the money. You can spend payday loans the same way you would spend your income.
- Payday loans are flexible and short-term. You can pay them back easily within few days or when you receive your next pay check.
- Many states prevent payday loan companies from charging interest rates above a certain percentage.
- Application for payday loans is convenient as you can complete the whole process by filling online application online from the comfort of your house. Many payday loan lending institutions open their office outside of regular banking hours. Therefore, you can conveniently obtain emergency payday loans at any time without stepping out of your house.
- Payday loans are there for you during emergencies. You can use the money to pay for unscheduled bills as you can often obtain payday loan within an hour,
Disadvantages of Payday Loans
However, payday loans are not without their disadvantages. Below are the major disadvantages of payday loans.
- Fees and interest payable on payday loans can be very high when compared with personal loans or small business loans. The fees can even escalate in case you are unable to pay at the due date
- Payday loans are just for a short period. If you need a loan for several months or longer, you may need to consider personal loans.
- If you don’t have a current bank account, you will not be able to receive a payday loan. Payday loan companies expect that you have a current account so that the loan can be deposited directly into the account. Also, the payday loan company will be able to draw the repayment from the account.
- Payday loans are not accessible to people working part time or receiving unemployment benefits or social assistance. It is only available to people with full time employment. If you are a freelancer with no regular or stable income, you will probably not be eligible for payday loans.
- The amount any payday loan company may release to you may not be more than $1,000 or $1,500 depending on the law of your state. If you need larger amount, you may need to apply for personal loan.
Read Also: How to Cut Down Your Student Loans
Requirements for Payday Loans
The requirements for qualification for payday loans vary from state to state. That is, each State has their specific guidelines governing the operations of payday loans. However, generally speaking, the requirements for securing payday loan are not as stringent when compared to that of personal loans. That is why payday loans are considered as good alternatives for people with bad credit who may not qualify for personal loans. That is not to say that payday loans are accessible to everybody. Before your application for a payday loan can be considered, you will need to meet the following basic requirements:
- You must be at least 18 years of age. This may be slightly different in some states. For example, you need to attain the age of 19 years in Alabama for you can be granted payday loan while in some places, the minimum age is 21 years. In essence, payday loans are not for minors.
- You must provide proof of income. It is not compulsory that you are employed but you need to have a steady flow of income to qualify for payday loan. A freelancer without a regular income may not qualify for payday loan.
- You must provide details of your name, address, home phone number, and email address. You must reside in the state where you intend to make the application. Therefore, it is expected that your address correspond with this state. Phone number is very important for the purpose of verification especially if you apply for payday loan online.
- You must provide personal identification such as government issued driver’s license or photo ID Card.
- You must provide a personal check. At times, borrowers may sign over electronic access to their bank accounts to receive and repay payday loans. Your check will definitely contain your bank’s routing number. If you don’t know what your bank’s routing number is, it is a nine digit number located at the bottom of your check. For Credit Union checking accounts, you can call your Credit Union and ask them for your ACH checking account number. Some Credit Unions may add additional zeros to the front of the checking account number or to the back. It is important that you provide the correct bank’s routing number. This will ensure that you get your funds into your account in good time without delay.
- You must provide a bank statement. Payday loan lenders require you have active account open for at least 30 days. Some may request for minimum of 90 days.
How to apply for payday loans
You can apply for payday loans online without visiting any lender’s office. If your online application is approved, the approved amount will be deposited directly into your bank account within the next business banking day. It is important to mention that meeting the above criteria does not automatically qualify you for payday loans. The lender may still need to scrutinize your application further by looking at the following:
- The amount of the payday loan. I mentioned that each State has their specific guidelines regarding payday loan Payday loans range in size from $100 to $1,500, depending on the maximum amount allowed by your state law. If the payday loan you are requesting for is more than the maximum amount allowed by the law of your State, such application may be disapproved.
- Your income level: If your income is low compared to the payday loan you are applying for, such application will be declined. Some States require that payday loan should not be more than 25% of your paycheck.
- If your employment period is considered too short, it may be difficult to secure payday loans.
- If you are already having a payday loan, you may not be granted a new one until the existing one have been fully paid.
Effects of Non Payment of Payday Loans
Payday loans are very popular because of the fact that the amount involved is usually very small. Also, payday loan is very easy to access. But before you rush into any payday loan, it is important that you are sure you will be able to pay it back at the due date. If you are unable to meet up your obligation at the due day, you may soon find yourself in the cycle of debt. You may be trapped that it will become difficult for you to get out of it. Let me give you this example so that you can understand what I am saying.
If you borrow $500 for a payday lender and you are charged $125 for 2 weeks. If at the end of the 2 weeks and you are unable to pay back the payday loan, the loan will be rolled over for another 2 weeks with another $125 fee. Supposing after 3 months, you are still not able to repay the loan, the fee must have accumulated to $750. If you add this to the principal of $500, this amount must have grown to $1,250. Can you see how expensive payday loans can be? This is crazy? Therefore, if you know that there is possibility that you will not be able to pay at the due date, payday loans may not be payday loan may not be right for you. Below are the consequences of not paying payday loans when due.
Credit Score: If you are unable to pay your payday loan, they may hire a debt collector to go after you. This may require that you are reported to major credit bureaus. This will definitely take a toll on your credit score. With bad credit score, it may be difficult for you to secure another loan.
Incessant Calls: If you have never fallen short on meeting your obligations to payday lenders, you may not know how disturbing they are. From day one your payday loan is overdue; you will start receiving calls from them demanding from you to repay your loan. They will not only call you, they can call your work place, friends and relations. If you are the type that doesn’t want your colleagues or friends to know that you borrow money, I believe you will not like this type of experience.