If you’re in need of money, you may be considering applying for a loan. Two popular loan options you may have come across are small loans and payday loans. But are they the same? Well, they’re actually very different.
So how do these types of loans work and what’s the difference between them? Is there anything you should be looking out for? In this Nifty article, we’ll help to clear the air and let you know how to tell them apart.
A small loan, or a personal loan, is a way for you to borrow a sum of money and use it to pay for expenses such as home improvements, holidays, and repairs. You then repay the loan, plus interest, over an agreed period of time known as the loan term. The interest rate can be fixed or variable and typically depends on your credit score.
Lenders may charge fees when taking out a small loan such as application fees, monthly service fees, and default fees. Small loans can be secured or unsecured. A secured loan will secure your loan against an asset you own, like a vehicle or house. An unsecured loan has no security and usually has a higher interest rate.
Payday loans are short-term, high cost loans that are designed to hold you over until your next payday, which is how they get their name. If you’re looking to cover expenses like unexpected bills or repairs, the small amount offered in a payday loan could help you pay for this.
When taking out a payday loan, lenders may ask you about your job status and income sources before deciding how much they’ll let you borrow. You may have to give them access to your bank account, or submit a post-dated cheque for the loan amount (plus any fees) that will be deducted from your next pay cheque.
While you won’t be charged interest on a payday loan, payday lenders can make up for this by charging fees. According to Moneysmart, these are some of the fees you could be facing with a payday loan:
As a payday loan is shorter, your repayments could be higher and unaffordable. When you consider the fees you could be charged for this, falling into a spiral of debt may be a possibility if you don’t think you’ll have the funds to make repayments on time.
Payday loans can also negatively affect your credit score if you’re missing out on repayments or have multiple loans on the go. If you’ve already got a low credit score, taking out a payday loan may only make it worse and further decrease your chances of getting a loan with a better value.
Still trying to decide which loan type is for you? There’s a couple of differences we’ll outline to help you make the best decision:
So, what’s the best loan option for you? It’s important to consider all of the terms and conditions that apply to the loan type you choose. As small as the print may be, you should try and read it carefully to make sure there are no surprises.
If you’re short on money now and aren’t confident that you’ll make repayments in time, a short payday loan with high fees may mean you’re taking a huge risk with your money. You may need to consider a small personal loan as a safer alternative.Apply Now
Since founding Nifty in 2016, Bell has continued to make waves within the local financial sector for his continued ambition and willingness to adopt emerging technologies.Read More