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A number of people think that personal loans and payday loans are one and the same thing. The reality is that they are poles apart. While both are a type of loan offered by financial institutions, there are subtle differences between the two terms.

So, what are those differences? Let’s find out.

What are the Differences Between Personal Loans and Payday Loans?

Payday Loans vs. Personal Loans

Personal loans are short-amount installment loans that are typically offered by banks and other financial intuitions like cooperative societies and federal credit unions. They are typically offered to individuals with excellent to good credit scores.

The rates on personal loans range from 5.5% to 9.3% for a person with a good credit score, which is defined as a person with a FICO score between 680 and 739. People generally take these loans to make home renovations, meet emergency expenses or even for buying electronic items. Mostly, they are dispensed in around two weeks.
Payday loans are also short-amount loans that people take to meet cash short fall until the next payday. However, there are a number of unique characteristics about the loan that are briefly described below.

1. Loan Requirements

Personal loans do not generally cater to individuals with not so perfect credit histories. According to latest data about FICO Score, there are 22% individuals in the US whose credit score is below 600 and classified as a bad credit. That’s about 70 million persons that can’t get a personal loan due to bad credit score.

Contrarily, payday loans cater to every individual irrespective of their past credit behavior. This allows individuals facing financial difficulties to get the much needed cash for paying important expenses. The loan’s only requirement is that the individual has a stable source of income. Unlike personal loans, the past credit mistakes of the individual do not matter with payday loans.

2. Finance Charges

Another important difference between personal loans and payday loans is that they entail largely different rates. While the annual percentage rates on personal loans are generally less than 10%, the rates on payday loan are high having an average of about 400%.

The reason payday loan lenders charge such a high rate is that they take on a huge risk when offering the loans to individuals with a bad credit history. The lenders charge a high rate to minimize the risk of loss due to a loan default.

Individuals won’t face much difficulty in paying the financial charges if the loan is repaid on time. For instance, the finance charges on a typical 2-week $200 loan can amount to about $30. However, if the borrower extends the loan or rolls over the loan to subsequent months, the net payments can turn into a large amount.

3. Application Approval Process

Payday loans, unlike personal loans, can be approved instantly. Individuals can obtain the loans in less than 48 hours if they conform to the loan requirements. Also, the application process is easy as they don’t have to submit a lot of documents, which is the case with personal loans.

Knowledge is power. The more you know about a subject, the better decision you will make. Keep in mind that the information contained here does not in any way advise you to obtain a particular loan. That’s a decision that you have to make for yourself. However, the information contained here will certainly facilitate in making the right move regarding loans.