We’ve probably all experienced what it feels like to deal with an unexpected expense which has thrown us back financially. It can happen at a time when you’re short on cash or when your next paycheck is still several days away. Fortunately, you are not helpless in moments like this. In fact, even if your credit score is less than perfect, you’ll still find viable solutions to counter your financial need. Two of the most popular options you can consider are payday and personal loans.
Payday and Personal Loan Differences
Payday Loans and Advantages of Payday Loans
Payday loans are short-term loans which you need to pay off on your next payday. Typically, payday loans allow you to borrow a small amount of cash (usually from $100 to $500) which you can pay in the next two weeks or on your next salary cycle. It’s a fast and convenient respite for cash shortages and financial emergencies.
Payday loan lenders typically do not check your credit score and make it a qualification for granting you a loan. This gives you a significant chance to obtain a loan even if with poor credit score. Instead, lenders would take into account your income and job stability. Meaning, if you earn at least their minimum required income or work their required minimum hours, you’re likely to get approved for a payday loan.
Lastly, most payday loans are approved within the same day you applied, so it’s very convenient when you need some extra cash at the last minute.
The Risks of Payday Loans
On the other hand, you need to be careful with payday loans, even if they’re accessible and convenient. Payday loans typically charge a flat fee for every $100 you borrow and the interest rate is usually high compared to other loans.
You don’t want to get payday loans just because you know you’ll always qualify, even with bad or zero credit. The amount of interest can balloon very quickly, and if you don’t settle the loan on the initial due date, the lender will roll it over, therefore doubling the payable on the next deadline. This is, however, not to say that payday loans are bad financing solutions. They are just designed for small financial emergencies and therefore should not be used for otherwise or other financial situations that aren’t temporary in nature.
Personal Loans and Advantages of Personal Loans
Another financing option that you can take advantage of is the personal loan. This type of loan allows you to borrow a more considerable amount than payday loans (up to a several thousand dollars) which you can pay for the next several months to a couple of years. Personal loans also come with a fixed interest rate and the payments are divided into equal monthly installments, depending on your loan term.
Multiple Loan Types
Personal loans come in two types. The first one is called the secured personal loan wherein you need to deposit an asset, say a home title or investment certificates, as security. In return, the lender is more confident that you’ll strive to pay the loan back and is likely to give you a higher ceiling for the loan amount and lower interest rate.
The other type is called the unsecured personal loan. This type of personal loan allows you to borrow without any collateral, but typically with a higher interest rate. The unsecured personal loan is also a viable financing solution for when you need a more substantial amount of money but have bad credit.
Use Your Personal Loan for Anything
Perhaps the best thing about a personal loan is that you can use it for a wide array of expenses. Most people would take out payday loans in times of unexpected cash shortages. But in the case of personal loans, you can take them even for anticipated expenses such as an upcoming surgery, wedding, and vacation. Some people also take unsecured personal loans to consolidate their loans, giving them just one fixed loan amount and interest rate to deal with.
Easier to Pay Back
For most people, taking personal loans is a far better option than payday loans due to a variety of reason. For instance, you can borrow a huge amount of money then pay it off conveniently in smaller increments monthly. This makes personal loans highly predictable and manageable. Additionally, personal loan lenders report to the credit bureaus. If you’re looking to improve your credit score with personal loans, you just need to make sure that you hand in your payments promptly and in full each month.
The Risks of Personal Loans
Just a word of warning though: don’t go shopping and inquiring about personal loans unless you’re serious about taking them. A large number of inquiries in a short span of time can badly hurt your credit score, so consider rounding up your options to just one to two reliable lenders. You can always look for feedback, research with the Better Business Bureau or ask for recommendations from people you trust to narrow down your options.
Why Personal Loans are the Better Option
Personal loans are the better options for different reasons. First, personal loans allows for flexibility and manageability. In most cases, you can work out the most suitable loan term with your lender. If you want to get over the loan quickly, you can pick the shortest time frame. However, if you’re borrowing a large amount and want a more affordable installment payment, you can always for a lengthier loan term. Also, personal loans come with a fixed interest rate so you’ll only be paying with such rate all throughout the life of the loan. No changes, no guessing. Your monthly payment remains the same until you’re done and over with it.
Personal loans can help you build and establish credit history. Many people face the dilemma of being unable to obtain a credit card due to their poor credit score. You can consider personal loans as one of best ways to build credit basically because they’re easier to qualify for than credit cards. In fact, unsecured personal loans don’t even require too much documentation and processing time and it’s highly possible to get approved within the same business day!
When you make the effort to pay off your personal loans promptly, you’ll notice your credit score climbing upwards over time. And it would be soon enough when you get to qualify for other financing options.
Can Borrow More
Lastly, personal loans allow you to borrow a significantly higher amount more than any payday loans can offer. A $500 urgent expense is one thing, but what if you want to consolidate all your debts amounting to a few thousand dollars and just deal with one loan? Personal loans allow you to do that. Additionally, you can use the personal loan for any expense at your discretion, whether to fund a small business, for home renovation, additional funding for your kid’s education, emergency healthcare expense, a vacation or a fancy celebration. Of course, you want to make sure that you only take personal loans for valid and useful reasons.
Both payday and personal loans are viable financing solutions for people with poor or zero credit, but they must be conceived as the same. Payday loans provide you with a smaller loan amount and higher interest rate, but these loans are quick and easy to qualify for. However, if you need a bigger loan, a more reasonable interest rate and enjoy the manageability of installment payments, then personal loan is the better option. You just need to remember that when signing up for either type of loan, you are confident that you can pay it back on time and that you’re taking the loan for a sensible reason.
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