Personal vs Payday Loan : Which One Is Better for You?

As a working professional, if you have ever been in a financial crunch or you are in the midst of one at the moment, one thought which must have come across your mind is the differences between a payday loan and a personal loan in India. While at first glance, they might appear to be similar, in reality, they share a lot more differences than meets the eye, and in today’s article, we will discuss them in detail.

Payday vs Personal Loan

One of the first and most important aspects we need to understand is the essential meaning of both these credit instruments. In simple terms, a payday loan can be understood as being a credit instrument which you can leverage to quickly secure a loan amount with minimal documentation. Most payday loans in India arrive with minimal documentation and are thus one of the best financial instruments if you are in a financial crunch and you require money urgently while wanting to pay it back upon the arrival of your next income. Thus, payday loans are generally very short term loans, and they arrive with a number of features which are absent from traditional lending instruments. 

On the other hand, a personal loan is a long term financial instrument which you can leverage in order to secure a loan amount to meet your emergency expenditures. Unlike traditional lending instruments which bind you to the spending area, such as a home or vehicle loan, a personal loan equips you with an ample loan amount as well as free will to spend your loan amount to meet any of your needs. For example, you can use the loan amount from your personal loan to either repay your credit card debt or use it for your next trip to Goa.

Primary Differences

Okay, now that we understand the essential meaning of both these financial instruments, let us comprehend the most significant differences between them. Payday loans and personal loans in India can be differentiated across four main verticals: loan amount, interest rate, repayment, and eligibility. 

Let us go over each of them one by one. 

• Loan Amount

When you are on the lookout for a lending instrument, it is only natural that the first aspect you will focus your attention on is the loan amount. In the case of a payday loan, most lenders across the country approve you for a loan amount equivalent to 40% of your monthly in-hand income. As payday loans are primarily designed to ease small expenses, 40% of your monthly in-hand income will almost be enough to fulfil your needs, such as rent, urgent car repair, monthly groceries etc. 

On the other hand, most personal loans in India arrive with a higher loan amount. Generally, you can borrow anywhere from ₹10,000 to ₹500,000 or even ₹40 Lakhs with a personal loan as per your requirement. Since these loans are generally long term, the loan amount is also higher, meaning you can take a personal loan to meet your higher urgent expenses such as medical bills, sudden vacation plans etc. 

• Interest Rate

Next to the loan amount, another important aspect of any lending instrument is the interest being charged. Since payday loans are generally very short term, they typically arrive with a higher interest rate. In most cases, lenders charge you approximately 40-50% interest rate on the loan amount, and as you can understand, this is the cost for convenience, as you need minimal documentation and can avail of the benefits of this loan instantly. 

On the other hand, since personal loans are long term loans, they arrive with much more affordable interest rates. Most lenders across the country charge anywhere from 8.5 to 36% per annum for personal loans, and since the loan amount, in this case, is also higher, it tends to work out for both the borrower as well as lender.

• Repayment

No matter what type of financial lending instrument you leverage, it is your duty and your obligation to repay it back on time, and thus the next vertical across which a payday loan and a personal loan can be differentiated is the repayment term. In most cases, payday loans in India arrive with a tenure of 2 to 4 weeks, meaning that you are required to pay back the loan immediately upon receiving your next paycheck. While some lenders do give you the option of extending your repayment term, in most cases, these are quite expensive as they arrive with additional cost on top of the interest you are already paying. 

On the other hand, personal loans in India arrive with a minimum tenure of 12 months, meaning you can pay back the loan amount every month via easy EMIs. The best aspect of this repayment style is the fact that it does not incur too much financial strain on your part, and thus you can comfortably repay the amount. 

• Eligibility

Last but not least is the eligibility requirement. Most payday loans in India require you to have a salaried job with a regular income in order to become eligible for the loan. As payday loans in most cases are secured against your upcoming paycheck, it is immensely important that you have a stable income source in the form of a salaried job in order to apply and subsequently get approved for this loan.

On the other hand, most personal loans in India are available to both salaried as well as self-employed professionals, meaning no matter the type of employment you hold; if you have a regular source of income, chances are, you will easily qualify for a personal loan in India.

In Conclusion:

On the surface, both personal and payday loans appear to be similar since they are both designed to financially assist you when you are in a crunch situation. However, only upon closer inspection do you realize that they are different from each other in leaps and bounds. 

Now that you know of the differences between a payday loan and a personal loan in India let us know by commenting below which one you will be applying for.