Personal Loans vs Payday Loans - Key Difference and which one to choose

Using up all your hard-earned savings to avert borrowing can be a risky endeavour and against the fundamental principles of personal finance.Instead, borrowing money can be a good option when faced with an urgent cash requirement. Also, taking a loan can be the right choice when financing out of your savings might not be a viable option.You can use both personal and payday loans to meet your financial requirements. But, you should first analysevs personal loans payday loans features in detail to understand which one can better serve your purpose.

A payday loan is a short-term unsecured loan, also referred to as a cash advance loan. Today, a few Non-Banking Finance Companies (NBFCs) in India provide payday loans, although the eligibility criteria may vary among lenders.

A personal loan can be a long or short-term loan that a borrower can use to fund personal obligations like weddings, higher education, home renovation, vacations, etc. These unsecured loans provide full flexibility and freedom to the borrower to spend the loan amount.

Since both these loans are unsecured loans, they may appear similar at first glance. However, a closer look across various parameters reveals the significant differences between them.

Loan Amount

Lenders usually offer very small loan amounts under payday loans. Typically, a payday loan amount depends on the borrower's monthly salary.On the other hand, a lender may sanction a relatively much higher loan amount under a personal loan. Reputed lenders can provide as high as Rs 50 lakhs as a personal loan based on the borrower's credit profile.

Choice of Lending Institutions

A select few lenders in India offer payday loans online. However, most reputed lenders offer personal loans through both online and offline modes. Therefore, it might be easier for you to apply for a personal loan with your preferred lender than to search for a suitable lender to get a payday loan.

Eligibility

The eligibility criteria of a payday loan are not as stringent as a regular personal loan. Due to the more flexible eligibility rules, even a person with a relatively low credit score can also avail of a payday loan. Lenders can provide such loans to anyone with proof of identification, a salary slip, and a bank account.Personal loans have a relatively more stringent set of eligibility criteria. In the case of personal loans, the lender makes a detailed assessment of your profile, beginning by checking your CIBIL Score. A credit score of 750 or above is usually considered good for granting a personal loan.Apart from the credit score, the lender analyses numerous additional information about the borrower regarding the individual’s income, loan repayment capability, credit history, debt-to-income ratio, etc. The lender will sanction the personal loan only after being satisfied with the borrower's creditworthiness.This is understandable considering the potentially high loan amount that can be approved under a personal loan.

Loan Processing Time

The personal loan approval process usually takes time. You might need to wait for one to seven business days to get the loan approved and transferred to your bank account. Payday loans have a relatively much quicker processing time.But personal loans are much more affordable than payday loans which usually charge extra fees.

Loan Tenure

Payday loans have a very short loan tenure, typically lasting for around sixty days or, at most, a year. However, a personal loan can come with a loan tenure of up to seven years.

Rate of Interest

The interest rates of a payday loan can be significantly higher than that offered in a personal loan.While the interest rates in a personal loan depend on the lender and the borrower’s profile, they usually hover around 11 % to 17% per annum. Now compare that with interest rates of payday loans that can go as high as 40% annually.

Both loan types are designed to cater for a specific set of requirements. Therefore, it is your requirement and personal choice that should settle the payday loans vs personal loans dilemma. Of course, you can decide with more conviction now that you know the differences between the two.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.