Payday loans vs short term loans – is there a difference?
Loans are a quick way to borrow money for things like a medical emergency, debt consolidation, home renovation, or any other project that needs financing. There are several types of personal loans, but in this article, we will find out the difference between payday loans and short term loans. Both types have their pros and cons. Read on to find out which type would be the right choice for you.
Apply for the loan
The application process for personal loans and short term loans is quite similar. For example, if you live in the UK, you must provide the lender with your citizenship card proving that you are 18 or over, a bank account, proof of employment and your latest payslips. Some lenders or brokers may ask you about your monthly expenses to assess whether or not you will meet repayments.
Payday lenders and short-term loan companies are required by law never to charge service fees and interest rates that could exceed the amount borrowed. Let’s say you borrowed £200 from a payday lender for a month. The expected refund at the end of the month would be around £248. However, when you borrow money from a short-term loan provider, you will get a much longer repayment term, but the service charge might be higher. Therefore, it is best to always read the repayment terms and know the interest rates of the type of loan you plan to access.
As mentioned above, conventional payday loans are borrowed for emergencies and need to be repaid within a month. On the other hand, short term loans are borrowed for longer periods of up to 12 months. Another difference between the two types is the repayment fees and interest rates. Normally in short term loans the interest rates are higher than in payday loans.
When you borrowed a short-term loan, the monthly repayments might be affordable, but the repayment amount would be higher. Repayment options also vary slightly between the two types, but as a general rule, prepayments can get you out of trouble and avoid high interest rates when payments are late. You can contact payday loan providers or short-term loan companies and ask them what benefits you would get if you made early repayments. For example, if you borrowed money for 30 days, some lenders would reduce their service charge by 50% if you paid within 15 days.
Payday loans are much easier to borrow than short-term loans. People facing financial problems or having difficulty borrowing due to their poor credit rating can also apply for a payday loan. However, these creditors will charge you higher interest rates than you would pay on a short-term loan.
bad credit report
Short-term loan providers report your credit score to the credit bureau, unlike most payday loan companies. This means borrowing money from payday lenders not touch your credit score. On the other hand, personal loan providers can improve your credit score when you repay on time.
Direct Payday Loans vs. Short Term Loans
Direct payday loans are best for people who need credit and can repay at a later date within a month. The UK has a decent market of payday lenders and brokers that you can explore to borrow money for an emergency. Before taking out a loan, make sure that the UK direct payday lender you choose is reputable and trustworthy. This is crucial because substandard payday loan providers have hidden fees and charges and are unclear in terms of repayment terms.
However, if you need to borrow credit for a longer term, you should consider applying for a short-term loan or other types of personal loans depending on the issue you are facing.
Short-term loans have a higher repayment rate than payday loans because when you apply for a short-term loan, the lender looks at your credit score, debt-to-equity ratio, or even asks for collateral against the loan if you applied for a secured loan. Personal loan. These requirements should to be fulfilled to get your loan approved. In any case, if you do not reimburse within the deadline, the guarantee will be considered as a reimbursement. You can also apply for an unsecured loan which does not require you to provide collateral. On the other hand, payday lenders do not assess credit rating, debt-to-income ratio, or your ability to repay on time before lending the money.
Let’s say you want to borrow a few hundred pounds for a short time. In this scenario, a payday loan would be the best choice. However, if you want a higher amount, consider applying for a short-term loan. You can always ask the lender or broker how much you can borrow, but remember that your financial health, debt-to-equity ratio, and credit score will all influence how much you have.
Alternatives to Personal Loans
Here are some alternatives to try to address the financial emergency you are facing, but remember that these alternatives may work for some and not for others.
Ask family and friends
If you’re not willing to get a personal loan, consider asking your family, loved ones, or even your employer to lend you the funds you need. Be open about your financial situation if you feel comfortable and tell them about your emergency. Finally, remember to be clear about the refund process and mention the date when you will refund them the money.
If the financial problems you are facing are not that urgent, you can apply for a home equity loan. The time it takes for these types of loans to be approved is around 2 weeks, so don’t apply for a home equity loan if you need urgent credit.
Credit card loans
If you have a credit card and a good credit rating, taking out a credit card loan would be a good alternative to consider, as these loans have a lower interest rate than most personal loans.
When comparing payday loans and short-term loans, payday loans are easier to obtain, but they charge high interest rates. On the other hand, short-term loans have lower monthly interest rates and offer more time for repayment, but you’ll pay more in service charges. Therefore, you should consider your needs before deciding which type of loan is best for you.